No matter how you are registered and regulated, you can’t afford to turn a blind eye to the breaches of your clients who are fiduciaries — investment committees of retirement plans, foundations and endowments, and trustees of personal trusts.
No matter how you are registered and regulated, you can’t afford to turn a blind eye to the breaches of your clients who are fiduciaries — investment committees of retirement plans, foundations and endowments, and trustees of personal trusts.
Even if you don’t acknowledge fiduciary status, the courts can make a determination that your actions gave rise to fiduciary status and hold you accountable.
This critical point is illustrated by an Employee Retirement Income Security Act case that was argued in March in the U.S. District Court for the Western District of Michigan.
The case, Ellis v. Rycenga Homes Inc., involved a small 401(k) plan (88 participants) with about $2 million in assets — at least there would have been $2 million in assets if the plan’s sole trustee (the company’s chief executive) hadn’t been taking unauthorized “loans” from the plan.
The case isn’t unusual. According to the Department of Labor, an estimated 1,500 cases of a similar nature are reported each year.
Edward D. Jones & Co. LP acted as broker to the plan and provided the trustee with investment advice on a periodic basis, and it was compensated for the advice with commissions, service fees and
revenue-sharing fees. The court concluded that the St. Louis-based broker-dealer was a fiduciary under ERISA even though the broker didn’t acknowledge fiduciary status and didn’t have any discretion over the plan’s investments.
In his opinion, the judge wrote: “Although it is certainly true that the possession of discretionary authority and control is generally the benchmark for fiduciary status under ERISA, it is also true that, in the special case of those providing investment advice, the existence of discretionary authority is not necessary to a finding of fiduciary status.”
As reported by Plansponsor magazine: “Even though the brokerage firm did not directly aide Rycenga’s former trustee Ronald Retsema in taking illegal loans against the plan that amounted to more than $2.1 million, it failed in its duties as an investment adviser by turning a blind eye and not inquiring about the loans.”
No matter how the vacated
broker-dealer exemption rule finally is resolved, financial services organizations need to define appropriate fiduciary policies and procedures to ensure that advisers working with fiduciary clients are cognizant of fiduciary practices. From what I have observed, very few organizations have done so.
Many advisers who provide investment services to fiduciary clients have little more training than what is required to pass the NASD Series 7 or 65 exams.
The maxim, “You can’t turn a blind eye to the breaches of your fiduciary clients,” is most certainly going to reappear as we begin to define the annual auditing criteria for the new “fiduciary adviser” (an investment adviser who provides specific investment advice to plan participants) under the 2006 Pension Protection Act. That law requires that the “eligible investment advice arrangement” between the plan sponsor and the fiduciary adviser be audited every year.
The question that arises under the law is, can the fiduciary adviser turn a blind eye to the fiduciary shortfalls of the plan sponsor? If the plan sponsor has done a miserable job of selecting and monitoring the plan’s investment options, does the fiduciary adviser have a duty to speak up?
If the plan sponsor has done a miserable job of controlling and accounting for the plan’s investment options, does the fiduciary adviser have a duty to suggest a proper analysis? And if the plan sponsor appears to be taking unauthorized loans from the plan, does the fiduciary adviser have a duty to make inquiries regarding the loans?
The answer, in each instance, is a resounding yes. Legislators, regulators and the courts can’t make the answer any clearer.
Specific to the Ellis v. Rycenga Homes case, what can an adviser do to catch unauthorized withdrawals from a 401(k) plan?
Keep a more critical eye on smaller plans. Most “thefts” occur with plans with fewer than 100 participants, when there is no requirement for an annual audit by an independent auditor.
Check the plan’s balance of assets under management at least once a quarter. Track down any balances that can’t be explained by market returns.
Be familiar with the financial health of your plan sponsor clients. Clients who fall on hard times are more likely to succumb to the temptation of “borrowing” from retirement assets.
Ensure that the payroll deductions of the plan’s participants are never commingled with any accounts of the employer — the plan should have its own, discrete account.
Conduct a self-assessment of the plan’s fiduciary practices at least once a year.
The management of our nation’s investible wealth isn’t intended to be a part-time activity overseen by advisers who have little to no training on fiduciary responsibility. Greater care needs to be taken by the financial services industry to ensure that only trained and qualified advisers work with fiduciary clients.
Donald B. Trone is president of the Center for Fiduciary Studies and chief executive of Fiduciary360 LP, both in Sewickley, Pa.
