Hosting an industry conference? Ask us about including it in this ticker?
What do you think of our site upgrade?

Why Should 401k Plan Sponsors Care What Others Think About the Fiduciary Standard?

June 21
01:21 2011

Confirming earlier studies, J.D. Power & Associates released their 2011 study on investor satisfaction and found retail investors have no awareness of the difference between the fiduciary standard and the suitability standard. This lack 391886_2973_cheating_5_aces_stock_xchng_royalty_free_300of awareness on the part of investors stood out as one of the cornerstone reasons why the SEC recommended the adoption of a uniform fiduciary standard. Although the J.D. Power survey measured only retail investors, its results might just jar 401k plan sponsors who think merely hiring a fiduciary represents the extent of what they have to do.

It’s often difficult to tell the difference between a card shark and an honest dealer. According to the press release issued by J.D. Power that accompanied the survey results, “85% of full service investors either have not heard of or do not understand the difference between a suitability standard and a fiduciary standard. It gets scarier. Again per the press release, “among those full service investors who are currently in a fiduciary relationship, 57 percent state that this increases their comfort level with their adviser, while 42 percent state that it decreases their comfort level.” Said another way, it’s very possible that for every five employees, two of them might react with concern upon finding their 401k plan sponsor has just hired a fiduciary.

Ironically, in January we chronicled the result of a new research paper whose lead researcher concluded 401k investors will tend to benefit from hiring a fiduciary charging an asset based fee of less than 1% compared to buying funds through a broker, (“Does New Study Seal the Deal for Fiduciary Standard – or Just Warn Plan Sponsors?Fiduciary News, January 19, 2011). Yet, the J.D. Power survey shows investors not only can’t conceive of the benefit of the fiduciary standard, but almost half of them aren’t comfortable with it. Face it, when you’re in the casino, you think everyone has an extra ace up their sleeve.

Let’s first consider this question: Do 401k plan sponsors act more like the fiduciaries they’re supposed to be, or do they act more like retail investors? The J.D. Power survey doesn’t answer that question, but the experience of industry experts might provide some anecdotal evidence. “Most plan sponsors we talk to are exactly like that, they look at us as if we are crazy and making this stuff up to sell snake oil,” says Mark Levin, an Accredited Investment Fiduciary (AIF) from Florida. He adds, “It’s very frustrating, but eventually, over the next 20 years the DOL will somehow get the message out. They have a great website, but I don’t think any HR people or business owners ever look at it.”

Courtenay Shipley, CRPS, AIF of Nashville, Tennessee says, “If ‘ERISA fiduciary’ or ‘fiduciary responsibility’ doesn’t have resonance with the plan sponsor and it’s not on their radar to even ask about, any broker and any product will do. Hopefully the fight continues simply for media attention to raise awareness, especially in the small to medium-size business marketplace. Don’t forget we live in a world where 401k plans are marketed by payroll and business solutions companies as though it were synonymous with ‘Would you like fries with that?’”

But not all advisers have experienced this level of frustration. Sean McGarry, VP and Retirement Plan Service Manager at Rockland Trust in Massachusetts says, “I am finding that more and more business owners are asking me the question, ‘Will you become a fiduciary to the retirement plan?’ Sometimes they don’t know why they’re asking it, but they seem to know it’s an important question to ask up front. In the last few months, I’ve even been asked “Will you be a fiduciary under Section 3(21) or 3(38) of ERISA?” As a result, we have recently modified our Service Agreement in order to make this distinction.”

Once a fiduciary adviser gets over the hurdle of finding a 401k plan sponsor that understands the importance of operating under the fiduciary standard rather than the suitability standard, the work doesn’t stop their – for either party. The 401k plan sponsor, in appreciating the significance of the J.D. Power results, will need the diligence to adopt education programs that address the lack of sophistication among many of their employees. The fiduciary adviser can (and should) assist in this effort – if not directly than by identifying appropriate resources.

With so many employees not trusting their 401k plans (see “Workers Unhappy with 401k Plans,”, June 17, 2011), simply stating the obvious fact of the benefits of the plan hiring a fiduciary adviser may not suffice. In addition, in all but the most extreme cases, waiting for the new fee disclosure rules to kick in won’t help either. After all, since a fiduciary standard adviser represents a higher level of service compared to a suitability standard adviser, one would expect to pay for that higher level of service.

Which now brings us to the final dilemma: Does the government have the right to force investors (and people in general) to do what’s best for themselves? (Along the same lines, does the government have the right to prevent you from smoking, drinking excessively, partaking in illegal narcotics, etc… Theoretically, whatever you answer, it will be consistently the same for all these issues since they all fall under the generic “does the government have a right to protect you from yourself” kind of question.

And if you answered “no” to the above question and assuming we all desire a level playing field where everyone in the industry can operate under the same rules, would you be more comfortable with the government removing all fiduciary regulations from RIAs or with the government requiring brokers, insurance companies, recordkeepers, TPAs, accountants, etc… to conduct their investment advisery business under the same constraints as RIAs?

Fundamentally, once you remove all the industry lobbyists, these are the questions the politicians need to answer.

As a fiduciary, you don’t have to even consider this question. The answer is already provided in centuries of tradition and practice. It’s as certain as the number of aces in a fair deck of cards. A fiduciary must always act in the best interests of the beneficiary, even if the beneficiary is not aware of those best interests.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Philip CHao
    Philip CHao June 21, 16:48

    I am not surprised by the report findings yet alarmed at the conclusion. “While higher levels of satisfaction are generally associated with clients in fiduciary relationships, legislating all advisors to this standard carries an unintended consequence of additional compliance oversight, which could translate into significantly higher costs—likely to ultimately be passed back to investors,” This is such over-arching garbage. 1) No one suggests that the fiduciary standard should be applied to everyone in the investment business. The fiduciary standard should be applied to those who are or present to the public as investment advisors and suitability or other lower standards should apply to investment sales professionals affiliated with FINRA. We simply don’t want a non-fiduciary advisor to suggest he/she is one by name only and all the while dolling out conflicted non-client centric advice, products and services. And 2) there is no credible statistics that clearly demonstrate that a non-fiduciary culture is “cheaper” for the public than a fiduciary one now or over time.

    Further, according to Lo, key best practices of client service include (in order of importance):
    • Clearly communicating reasons for investment performance (investment education does not differentiate fiduciary standard from suitability standard)
    • Clearly explaining how fees are charged (more disclosure does not differentiate fiduciary standard from suitability standard)
    • Proactive advisor contact regarding new products and services or accounts four times in the past 12
    months (informing clients of new products and services certainly frequently does not differentiate fiduciary standard from suitability standard)
    • Returning client calls/inquiries within the same business day (behaving as a professional and a decent human being does not differentiate fiduciary standard from suitability standard)
    • Reviewing or developing a strategic plan within the past 12 months (communicating and working with one’s client does not differentiate fiduciary standard from suitability standard)
    • Providing a written financial plan (delivering a work product does not differentiate fiduciary standard from suitability standard)
    • Discussing risk tolerance changes and incorporating into plan where appropriate in the past 12 months (this is necessary even under the suitability standard)

    Lo failed to understand that even if every conflicted investment advisor adheres to his list of “best practices” at best met the suitability standard but not sufficient to demonstrate that the advisor necessarily has the client’s best interest at heart. Behaving well as a sales person so that he/she can keep the client and sell more products or to be better than his/her competitors may be considered “best practices” in Lo’s world but it is not enough in the fiduciary world…a world where every investment advisor must operate from.

  2. Lynne McAuley
    Lynne McAuley June 21, 21:09

    Thank you, Chris. I will check out the survey. Again, I always enjoy reading your columns.

  3. Steve Patterson
    Steve Patterson June 23, 16:32

    Chris, I really enjoy your columns. This one confirms my experience.

Only registered users can comment. Login is sponsored by…

Vote in our Poll


The materials at this web site are maintained for the sole purpose of providing general information about fiduciary law, tax accounting and investments and do not under any circumstances constitute legal, accounting or investment advice. You should not act or refrain from acting based on these materials without first obtaining the advice of an appropriate professional. Please carefully read the terms and conditions for using this site. This website contains links to third-party websites. We are not responsible for, and make no representations or endorsements with respect to, third-party websites, or with respect to any information, products or services that may be provided by or through such websites.