Wall Street caveat emptor

Published on August 5th, 2013 | by Mark Mensack

Caveat Emptor

caveat emptorThis is Part 4 of a six part series on choosing a 401k plan advisor?

Wouldn’t a reasonable 401k plan sponsor be put at ease with the phrases they find in the large print of the marketing material of many 401k service providers like: “third-party source of independent guidance,” “professional advice for plan sponsors,” “unbiased guidance” and “commitment” to help you meet your fiduciary responsibilities?”

While these phrases all sound like valuable services, they are often merely buzzwords that indicate phantom fiduciary status. For example, the following words or phrases are all red flags: recommendation, helps, assists, suggested, for you to choose, and for consideration by the plan sponsor. These are red flags because while they imply some sort of fiduciary status, they all mean that the plan sponsor is still the decision maker and that the provider is taking no true fiduciary status – which equates to no fiduciary protection!  Perhaps the biggest red flag is the word “co-fiduciary.” Under ERISA there is no such status as co-fiduciary; it’s akin to “a little bit pregnant.” Under ERISA the only mention of “co-fiduciary” is to describe the relationship between two fiduciaries – both of whom have fiduciary responsibility and potential fiduciary liability.

Often in the mouse print of the contracts for these programs you’ll find explicit phrases that contradict the large print. For example, the phantom fiduciary “has no authority or responsibility with respect to the selection, monitoring, retention, or termination of asset classes or investment options” or “the foregoing matters are solely the responsibility of the Plan Sponsor or its agents.”

If there is any question as to the value of these sorts of programs one need only read the Mullaney v. Principal Financial Group case. The Principal Due Diligence Program was marketed as “a “qualitative and quantitative” review process “for identifying, selecting, and monitoring investment management firms” for investment options…” similar to what I’ve described above.

Mullaney argued that:

28. “Defendant The Principal Financial Group, Inc. (“PFG”) is a Delaware corporation, and is a fiduciary with respect to the Plans. PFG offers and provides retirement savings investment and insurance products and services…”

Principal’s response was: “To the extent a response is required, Defendants deny the allegations in Paragraph 28.”

The Court’s opinion in Hecker v. Deere explains the significance of buzzwords like helps. assists and recommends:

“Merely “playing a role” or furnishing professional advice is not enough to transform a company into a fiduciary.  There is an important difference between an assertion that a firm exercised “final authority” over the choice of funds, on the one hand, and an assertion that a firm simply “played a role” in the process, on the other hand.”

Since the Financial Industry Regulatory Authority and Securities Exchange Commission have regulations against deceptive or misleading marketing, and have rules mandating principles of fair dealing and good faith, one has to wonder why these sorts of programs aren’t prohibited. For more, see Caveat Emptor for 401k Plan Sponsors.

To learn more about Mark Mensack, visit his sites at www.prudentchampion.com and  www.fiduciaryplangovernance.com.

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About the Author

Mark Mensack

Mark Mensack, AIFA®, GFS® is affiliated with Fiduciary Plan Governance, LLC. and the Centre for Fiduciary Excellence (CEFEX) where he serves as an independent fiduciary consultant, and a CEFEX Analyst. Mark has a Masters in Philosophy from the University of Pennsylvania and is a former US Army Officer. His final active duty assignment was on the faculty of the United States Military Academy at West Point, NY where he taught Philosophy, Ethics & Critical Reasoning. He has nineteen years of financial services experience; fourteen as a financial advisor with broker-dealers, and five as an RIA. His expertise is in the area of fiduciary best practices, 401k hidden fees and ethical issues in the retirement plan marketplace. Mark also writes the 401k Ethicist column for the Journal of Compensation & Benefits and is listed among the 2013 Top 100 Most Influential People in the 401k Industry; some of his work can be found at www.PrudentChampion.com. Mark welcomes examples of ethical issues in the retirement plan space, and especially misleading 401k marketing materials at 401kEthicist@PrudentChampion.com

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