Fiduciary Liability: The Little Known Danger Lurking in Your Business

“Whoever is careless with the truth in small matters cannot be trusted with important matters.”

Albert Einstein

For every notable quote about trust that we read, it always seems to be offset by disturbing headlines like The Town of Fairfield, CT pension fund having $42 million wiped clean in a Ponzi scam.

But trust is a very real and necessary thing, especially when it comes to business owners protecting the retirement plans of their employees. Let’s face it, many companies are putting hundreds of thousands or maybe even millions of dollars, into their company retirement plans on behalf of their employees. And this is the point that business owners need to make certain they’ve entrusted their funds in the right keeper of the gate.

This is when you need to trust a fiduciary to handle your funds. But before you can trust a fiduciary it’s prudent to know exactly what a fiduciary is. A fiduciary is a person that has the power and responsibility of acting for another in situations requiring total trust, good faith and honesty. When you’re the beneficiary of a fiduciary relationship, you give that fiduciary discretionary authority over your assets. So a fiduciary financial advisor can buy and sell securities in your account on your behalf without needing your express consent before each trade. Because fiduciaries have this discretionary authority, they’re held to a higher standard than non-fiduciary advisors.

But choosing a fiduciary is not a “one-size-fits-all” situation. Many Retirement Plan Advisors are not true fiduciaries and try to puff up their stature by claiming they are an ERISA 3(21) fiduciary. A 3(21) Investment Advisor works with you to recommend the investment lineup for your plan but does not have discretion over plan investments. If you prefer to maintain discretion and control of your plan’s investments, then hire a 3(21) Investment Advisor to select investment funds to make available to your employees. It’s up to you to approve the fund lineup as well as any recommended changes over time. Under this arrangement, the 3(21) Investment Advisor delivers value, but is limited to making recommendations. You would continue to have the liability for selection, monitoring and updating of the plan’s investments.

If your goal is to minimize your fiduciary liability to the fullest extent, you should consider hiring an ERISA 3(38) fiduciary to which you delegate full authority to make decisions about the investment lineup. The 3(38) Investment Manager will have discretion, authority and control to manage the fund lineup. They will acknowledge their fiduciary status in writing. By doing so your liability is limited to prudently selecting and monitoring the 3(38) Investment Manager and benchmarking the reasonableness of their fees. And make no mistakes about it, fees can be an issue.

First, there are explicit fees-fees that you can actually find because they are ‘explicitly’ stated.

Explicit fees in qualified plans are two-fold: first, there are explicit costs to handle the administration and recordkeeping functions of the plan. Secondly, there are explicitly stated investment expenses. You are required as a plan sponsor to know all of these explicit costs. The other side of costs is the implicit expenses associated with your plan. These costs can hurt the overall investment return for your participants because many of these expenses are not easily detected and often come out of the investment returns.

The implicit costs are two-fold in nature as well. First, just like the explicit costs, they are implicit costs associated with the administration and recordkeeping aspect of your plan. Secondly, are the implicit investment expenses? Transition and investment expenses are the ones that can be the most detrimental to your plan.

Having the right fiduciary at the helm is very important. Another reason why is because sometimes these plans can bothersome. You can have employees complain of poor investment performance, confusion due to too many fund choices, administration problems; on and on and on. In many cases, poor investment performance can result in employees complaining to HR or upper management. What was supposed to be an employee benefit and perk ends up becoming a frustration to the business owner and the participants. In the end, morale goes down and no one is happy.  Why does this happen?

According to the “Fiduciary Awareness Guide” put out by Mark Matson, CEO of Matson Money – a Registered Investment Advisor with over 9 billion in Assets Under Management, there are seven reasons everything can go south in a hurry when business owners don’t have the correct fiduciary in place:


  1. Not knowing that a business owner is a Fiduciary
    The definition of fiduciary is any person that has discretionary authority over the plan assets or who exercises any control over the plan assets and gives investment advice to the plan for compensation. So, when it comes to your company, you, as the business owner (the sponsor of the plan), are going to fall into this purview of a trustee; in other words, a fiduciary. Not only are you liable for the performances of the company or the organization, but you are personally liable for any breaches of fiduciary standards.
  2. Relying on a Broker for Investment Advice
    By definition a broker cannot be a fiduciary. Many plan sponsors with 401(k) and profit-sharing plans rely on the advice of their brokers. They are assuming that because they have brokers, they are protected from all of the regulatory requirements and are insulated and protected from fiduciary requirements. This is not the case. A broker basically serves as an intermediary for the brokerage firm to sell a product to the plan sponsor/trustee. As a matter of fact, it would be a breach of fiduciary duty if the person who is giving independent advice was earning a commission. Brokers can’t be counted on for this type of independent advice because they are not acting as fiduciaries of the plan.
  3. Not knowing your responsibilities as a plan sponsor.
    The fiduciary’s role is to manage risk and expected return by developing and monitoring the trust portfolios. Not only are these your primary responsibilities as a fiduciary, but the great news is that there is an academic and scientific method, if applied appropriately, that can give you very good solutions and prudent reasons for making an investment decision. Ultimately this helps to reduce your liability. Fiduciaries who are willing to work with an expert who understands Modern Portfolio Theory will have a certain amount of comfort and a degree of protection from both litigious employees and the Department of Labor should you be audited.
  4. Using Active Management
    It’s a process where three things happen.
    The first thing is Stock Picking, which is when you hire a manager, mutual fund company, or a large financial institution and they buy and sell individual stocks inside of a mutual fund in an attempt to provide superior returns and beat the market.The second is Market Timing, when you hire a fund manager or money manager and they buy stocks when they think the market is going to go up or sell stocks when they think the market is going to go down.The third is Track-Record Investing. This is when you look at a fund or money manager’s past performance over the last 10, 15, or even 20 years, and use this as a tool in the hope of superior performance in the future.These three different types of hyperactive management are extremely suspect. They leave the plan sponsor/trustee exposed to many potential litigious problems because studies show that those forms of investing are much more in line with speculation, not true prudent investing.
  5. Relying on Section 404(c) for reduced Liability
    As a fiduciary, you have to do certain things to qualify for 404(c). You have to have substantial investment options available for the participants to choose from. These options have to be able to provide true diversification for the participant. If you elect 404(c), you have an employee education requirement. You also have a requirement to let participants make changes in their portfolio on a semi-regular basis. Many plan sponsors mistakenly believe that the fiduciary liability is now transferred to the participants. The reality is if these funds are found to have excess cost, don’t provide a wide enough range of different asset classes, consistently underperform the market, have too much risk, or if there’s no ongoing process to determine if those funds were appropriate or achieved their stated goals, then 404(c) is not met.
  6. Not understanding the costs, commissions and fees in the plan
    What is troubling for many investors is the reality that their investments have hidden fees. These hidden fees affect the overall return of their portfolio. This can be very frustrating for plan participants since they have no control over these costs. The only way to discover what these hidden costs are is to do an independent analysis. As a fiduciary, it is important to be able to understand and calculate these fees. All plans have fees; you need to be able to measure those fees and see if they are in line with the industry. Remember, they must be reasonable and measured.
  7. Not having an Investment Policy Statement
    The Investment Policy Statement (IPS) outlines the asset allocation, risk tolerance, and liquidity requirements of the Plan. The most important duty of the fiduciary is the development and ongoing maintenance of an investment policy statement. The Investment Policy Statement also assists plan sponsors/trustees in the event of a regulatory audit and show that they are following a procedural process. One of the most important functions of the IPS is to make sure that the investment options are prudent and offer the diversification that plan participants need to meet their investment objectives.A recent court decision in California federal court further drives home a plan sponsor’s fiduciary responsibility. The large California utility, Edison International, was found to have breached their duty of prudence because they chose retail mutual funds for their plan investments, when they could have chosen, less expensive institutional class shares of the same mutual fund. Edison International was liable because they paid retail, instead of buying at a discount. There was no malfeasance by Edison, just laziness in not bothering to understand that an institutional share class of mutual funds was available and would have saved plan participants in mutual funds expenses.No company wants to be highlighted negatively in the business section of their local newspaper because they acted irresponsibly in its company retirement plans and pensions. Just ask the Town of Fairfield, Connecticut if doing more homework when it came to entrusting their funds to the right person could have saved the day. I believe the answer is obvious.

This article appeared in the Long Island Business News, September 27th to October 3, 2019 Edition and Provident Business News, October 18-24, 2019 Edition. You can download them HERE.

Robert Stabile’s articles have appeared in such well-respected publications as “Small Business Today Magazine,” “Long Island Business News,” Providence Business News,” and others.

Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisory located in Melville, Long Island. He has over 30 years’ experience in personal risk management and has spent the last 8 years as an investor coach dedicated to helping clients understand their true purpose for money, understand what Wall Street costs them and delivering Nobel Prize Investment Strategies that meet the Prudent Man’s Rule of Investing. Higbie Advisory, LLC is a co-advisor to Matson Money an ERISA 3(38) fiduciary. Robert could be reached at 

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