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Hidden Fiduciary Problems with Investment Selection

investment selectionInvestment Selection

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.

Dorann Cafaro

Dorann Cafaro

Dorann is a retirement consultant dedicated to fiduciary protection of plan fiduciaries (sponsors, committee members, fiduciary advisors) and SmartPension DB plans. She is working closely with Bdellium to provide fiduciaries with decision-support tools. Dorann was the founder of Cafaro Greenleaf, with roots going back as far as 1981 with long term partner and daughter Jamie Greenleaf. Dorann was Senior Vice President of Fiduciary Benchmarks, an Executive Vice President for National Retirement Partners, a leading national network of independent retirement experts now an LPL company. Dorann has been nationally recognized throughout the retirement industry, a frequent and keynote speaker on the retirement industry at national conferences and seminars. She was inducted to the PLANADVISER's Hall of Fame in 2011, named Retirement Advisor of the Year by PLANSPONSOR magazine 2006, and 401k Wire's 50 most influential people in the 401k retirement industry for 2006 to 2011 and has testified in front of the USDOL.
Dorann Cafaro

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