The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

Fiduciary Prudence in a Post-2008 World-Part Two

March 2009

In my last entry, I began introducing the components of a prudent fiduciary process in the wake of the trauma the financial markets experienced in 2008.

Prior to 2008, many plan sponsors already knew that the majority of participants are ill-equipped to manage their own assets, but this past year crystallized that reality. Given that, I made the point in Part I that the first component every plan should provide is a strong “do-it-for-me” solution.

The second component relates to an issue that continues to garner a lot of attention, not only in the financial press, but also with lawmakers: fee disclosure.

Section 404(a)(1)(A) of ERISA states that fiduciaries should pay only fees that are “reasonable”. Asserting that many of the nation’s largest employers, and the individuals responsible for their 401(k) plans, have failed that fiduciary duty, the St. Louis law firm of Schlicter, Bogard and Denton filed class-action lawsuits in 2006 that continue to be heard in the judicial system today.

While acknowledging evidence that some of the defendants have been negligent in their processes and that some “may not have been behaving admirably”i, the courts are typically ruling in favor of the plan sponsors and the plan providers. The burden of proof has been difficult and revenue-sharing, the root cause of the lawsuits, continues on.

Recognizing the difficulties facing plan sponsors and that the courts appear to not be a source of clarification, the Department of Labor (DOL) is also weighing in on fee transparency with proposed regulation 408(b)(2). In short, the regulation would require that all forms of compensation received by service providers be fully disclosed. But as expected, many service providers are fighting 408(b)(2) aggressively and the regulation has still not been adopted.

So with no direction from the courts and delayed assistance from the DOL, what is a plan fiduciary to do when it comes to ensuring that the fees paid by a plan are “reasonable”?

There are two viable options:

1. If your service providers (investment advisor, consultant, TPA, Recordkeeper, etc.) receive any type of revenue-sharing, you should require each service provider to annually complete the DOL’s “401(k) Plan Fee Disclosure Form”ii. This seven-page form asks specific questions that seek to uncover a provider’s sources of revenue, even those “hidden” fees that are difficult to decipher within service agreements. (Note: Capital Directions has created a shorter, three-page version of this document to help plan sponsors obtain the most meaningful information from providers in a concise manner. Contact me if you would like a copy of this document.)

2. The fiduciary can choose to work only with service providers that do not receive revenue-sharing. Fee-only service providers are still the minority in the 401(k) world, but the inherent transparency is driving many plan sponsors to this model. The fee-for-service arrangement involves fees being invoiced directly, either to the plan or the plan sponsor, as opposed to being deducted from investment returns.

Once total expenses of the plan are determined, the judgment of their reasonableness is still a subjective process. Only a time and labor-intensive RFP process evaluating comparable service providers would ensure that fees and expenses were indeed reasonable. Fortunately for plan sponsors, an acceptable best practice is to benchmark a plan every three to five years, followed by annual documentation of the plan’s total expenses.

While it may be a challenge for fiduciaries to fulfill the responsibility of ensuring the reasonableness of plan expenses, the ERISA mandate is clear, and the focus on that mandate will only likely increase going forward. Demanding full transparency of fees and expenses will be an integral part of a prudent fiduciary process for the foreseeable future.

 i Employee Benefits Institute of America, “Seventh Circuit: Non-Disclosure of Revenue Sharing Did Not Violate ERISA”,, March 10, 2009.

ii United States Department of Labor, “Retirement Plans, Benefits & Savings: Fiduciary Responsibilities”,, March 10, 2009.

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