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Is the Fiduciary Standard Enough? 3 Critical Fiduciary Duties Every ERISA Plan Sponsor Must Know

May 18
22:58 2010

Congress, regulators and the financial industry itself sit on the cusp of requiring all financial service providers who provide investment advice to adopt the fiduciary standard. Now is a great time for ERISA Plan Sponsors (as well as those who 819458_11139937_bank_columns_royalty_free_stock-xchng_300provide investment advice to ERISA plans or participants), to familiarize themselves with the nature of fiduciary duties. The anticipated change in the law may expose these officers and vendors to a fiduciary liability they might not have anticipated.

“The duties ascribed to corporate trustees, especially the duty of loyalty, are often benchmark standards for other types of fiduciaries,” writes Janice J. Sackley, CLU, CFE in the March/April edition of Currents, a publication from the National Society of Compliance Professionals. She explains how many might be surprised to discover the fiduciary standard being debated in Washington D.C. today derives from well established trust law. A healthier appreciation of these traditional fiduciary duties may allow ERISA trustees, fiduciaries and plan sponsors to better assess their true liability risks. This awareness will become more important if, in the future, Congress and/or regulators adopt the fiduciary standard across the board.  Additionally, where fiduciary relationships already exist, a deeper understanding of these duties can help the plan fiduciary better evaluate whether their current advisers adhere to true fiduciary principles.

Among these and other critical points Sackley identifies, the following three trustee duties especially apply to ERISA fiduciaries:

  • Duty of Loyalty – The fiduciary must not engage in acts of self-dealing.  This is perhaps the most fundamental duty.
  • Duty to Keep Property Separate and Maintain Adequate Records – Client property must be segregated from the property of the fiduciary and adequate records must be kept.
  • Duty of Prudent Investment – The fiduciary who manages investments has a duty to comply with the prudent investor rule unless otherwise agreed to with the client.

Sackley is a fiduciary consultant with Fiduciary Foresight, LLC, a firm that advises financial institutions on regulatory compliance and fiduciary risk management issues. These duties and others are discussed in the context of bank and thrift trustees in her original (and very well written) Currents article “Duties of a Trustee and Other Fiduciaries; Will Trustees Set the Bar for the Fiduciary Standard?”  The piece discusses the fact regulations governing banks acting as investment managers are prescribed by the banking regulators and in some cases are more onerous than those currently prescribed by the SEC for registered investment advisers and by the Department of Labor for firms advising ERISA plans.

One wonders when regulators will ever go beyond the “Fiduciary Standard vs. Suitability Standard” debate and begin to address the real issue. Will Congress, the SEC and the DOL upgrade the current fiduciary standard to the trust model used by bank trust departments so successfully for more than a century? After all, unlike the mortgage derivative fiasco, when’s the last time you heard of a bank scandal coming from the trust department?

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About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

4 Comments

  1. Kevin Condon
    Kevin Condon May 19, 11:33

    Financial advisors are available to the public that use the fiduciary standard now, but their message is lost in a storm of conflict-laden white noise advertising from investment companies whose mutual fund business and annuities were built on a commission or compensation from transaction model. A model that de-links compensation from advice, clearing up the distinction between “product help” and “real” fiduciary advice is the reason for the FINRA SEC battle over turf promoted by the media and the large financial services companies. The real issue is what the “real” meaning of the word “fiduciary” is.

  2. Don Moore
    Don Moore May 20, 10:44

    “A fiduciary is as a fiduciary does.” – I know I stole that from a movie. Ms. Sackley does a fantastic job of outlining the roles and responsibilities of a fiduciary. The fact is that there are many financial service organizations that hang out their shingle as a fiduciary but at times do not always perform their fiduciary role. Over the past few years, litigation against fiduciaries has increased, settlements have increased, and losses as a result of these areas has also icreased. While the actions that have caused these losses are not scandalous, they do indicate that the blurring of the definition of fiduciary is causing some organizations to increase thier fiduciary risk potential. Adding more concern is that the “reward” component for the fiduciary activity is not comensurate with this increased risk potential.

    Perhaps one definition for the industry, agreed to by all the regulatory indstustries, and enforced consistently would eliminate much of the concern. Until this happens, there may be different standards and therefore a “fiduciary is as a fiduciary does.”

  3. Lynne McAuley
    Lynne McAuley May 20, 22:21

    Thank you for a thought provoking blog. The fiduciary standard itself is quite high. Where it gets dicey, at least with ERISA, is all of the prohibited transaction class exemptions. The exceptions to the rule become the new rule. Common industry practices evolve into the class exemption.

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