Industry expert and Founder of 401kTV, Fred Barstein made the very perceptive comment regarding investment selection in his recent post Problems using a record keeper’s proprietary funds that “at the heart of the DOL rule is making parties that have influence over which investments are selected a fiduciary, changing their role from determining if an investment is suitable to looking out for a client’s best interest.” What is extraordinary about this statement is that it touches more than just your record keeper’s use of proprietary investments by raising good questions we all should be asking regardless of the DOL rule status.
By now we have all heard that fiduciaries have a duty to prudently oversee investment selection and monitor investments that are in the best interest of their plan participants, but sometimes the investment selection process hampers that duty. Sadly fiduciaries may not have even been aware that their fiduciary duty is being thwarted.
A prudent process needs to include asking about any restrictions to the investment selection. Will the selection recommendations be made from a completely open architecture platform in which all potential investments are available for consideration for your plan? If not who is limiting the selection:
- The record keeper who limited which investments that were available on the platform. Is the record keeper now a fiduciary since they have limited the selection? What if the choice of investments is not a good fit for my plan participants? Should I change my record keeper? Why are these specific funds on the list? Were they chosen using a prudent process or were they chosen because of a relationship with the record keeper? Were they part of a pay-to-play scheme?
- The Robo-Advisor that only offered select index options or portfolios. Can that Robo-Advisor be a fiduciary since it influences the selection? And who limited that Robo-Advisor’s investment universe and was there financial payment tied to which options are proposed?
- The advisor’s firm who limited what investments the advisor can recommend. Is the firm or the advisor now a fiduciary? Yes and most are willing to acknowledge that they are acting as a fiduciary but how do we know that investments that have been approved by the home office are really in our best interest if the universe was limited or worse only reflects investments that were willing to pay the advisor firm’s distribution?
- The asset managers who offered “rebate” fees only on proprietary investments that were listed on their related record keeper’s platform. Are they fiduciaries as they are influencing the selection?
When selecting investments you need to ensure that the process you use is comprehensive and unbiased. This means asking more questions of everyone that touches the plan investment selection in order to uncover hidden bias. Ask them about any hidden bias. And don’t forget to document these efforts as evidence that you are acting diligently and prudently when making key fiduciary decisions.
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