Wisdom for Qualified Retirement Plan Sponsors: Focus on Your Five "T's"

By Al Otto AIFA® CBFA and Heath A. Miller JD, LLM

It has long been said, "A man cannot serve two masters." In fact, it is Biblical.

Despite such sage advice, this practice is both expected and condoned in the context of employee benefits. This presents fiduciaries with difficult decisions, and if something goes awry, generally results in a bad set of facts surrounding the appropriateness of their actions and decisions. This is especially true when they relate to investment matters.

Investment decisions involve risks and uncertainties, and are often based on information or guidance that is provided by someone in a position of trust. Of course, this begs the question, "How can a fiduciary be sure that the advice being given is sound, objective, and reliable?" As a fiduciary, additional due diligence (beyond that which an individual may exercise for his or her personal affairs) is required in order to assure that conflicts of interest do not exist, and do not surface unexpectedly after an arrangement is in place or a transaction has been completed. Failure to identify the existence of conflicts of interest can detrimentally affect both the participants and beneficiaries, but also the fiduciaries' personal finances. Identifying and eliminating conflicts of interest, can significantly reduce the likelihood of litigation by avoiding not only the appearance of impropriety, but also the occurrence of actual impropriety. .

Recent history has shown that conflicts of interest in the employee benefit context are not well understood and, as a result, oftentimes remain unidentified. Unfortunately, these latent conflicts can lead to enterprise-risks that can otherwise be easily avoided with just a bit of work up front. If the responsible fiduciaries are simply armed with basic information, a simple approach can be used to identify not only when the services of a third party should be considered, but more importantly, how to logically evaluate third party service providers. While the following discussion focuses on third party investment professionals, the approach outlined below can be adapted and applied when evaluating any service provider.

It all comes down to the five "T's" - Time, Talent, Tools, Trust, and Terms.

ime: Ask yourself, as a fiduciary, "Do I have the time, to manage and administer the plan and the associated investment matters?" If so, go to Step 2. If not, you need to seek assistance from an independent outside advisor, and evaluation of the outside advisor should begin with Step 2.

alent: "Do you or your advisor and its organization possess the necessary talent needed to provide the service being evaluated?" A surface level analysis would include years of experience, any applicable certifications or degrees that you or the advisor may have. It would also include an evaluation of your, or the advisor's experience (g., assets under management, history with similar arrangements, organizations or plans, etc.). Remember, when acting as a fiduciary, the standard of care is oftentimes that of a "prudent expert," not simply a "reasonable person." This is a very high standard. Therefore, as a fiduciary, if you determine that either you or the advisor you are evaluating lack the requisite "Talent," further assistance must be sought elsewhere. In fact, failing to seek assistance may subject you to personal legal liability. Of course, the evaluation of potential candidates should always commence with this step. In contrast, if you conclude that you or the advisor being evaluated possess the necessary "Talent," then the evaluation should proceed to Step 3, below.

ools: "Do you or the advisor and its organization possess the necessary tools to provide the service being evaluated?" The key here is to understand the depth and capability of the resources and tools available and whether, or to what extent, the knowledge and skill needed to utilize those tools exists. For example, if you hired Michelangelo himself and asked him to replicate the ceiling of the Sistine Chapel, but armed him with only an orange crayon, notwithstanding all of his talent, it's doubtful that he'd be able to reach his full potential. Needless to say the resulting work would be less spectacular than what you might otherwise anticipate. Similarly, if you or the advisor you are evaluating possess the necessary investment Talent, but lack the Tools to identify or evaluate investment alternatives, it may be all but impossible to satisfy the legal standard of care that exists.

rust: "Can you trust yourself and your organization, or the advisor and its organization, to always act solely in the best interests of those whom you've been entrusted to serve?" If you're asking this question of yourself and your organization that means you've already concluded that you and your organization possess the necessary Time, Talent and Tools to do the job. Ironically, the culmination of all three of these qualities is pretty rare among plan sponsors and most commonly exists only among organizations that happen to be in the financial sector. Unfortunately, this means that the potential for self-dealing is more pronounced than it might otherwise be. In fact, a fair bit of litigation has arisen recently regarding the manner in which some of the largest and most well-known financial organizations have handled their own retirement plans- specifically, when their own proprietary investments (and/or those of an affiliate) represent the bulk of the investment alternatives or the majority of the plan's assets.

In contrast, if you are evaluating the services of a third party, again, if you've gotten to this step, you've concluded that you don't have the Time, Talent and/or Tools and that the third party you are evaluating does. So, how do you determine if you can Trust the advisor and its organization? This is where conflicts of interest come in, and also where even the most seasoned fiduciaries can get snowed, as folks tend to confuse the perceived honesty of an individual representative with the structural trustworthiness of the organization that the person represents.

While there are clearly bad actors and some do have nefarious intentions, this is not typical. To the surprise of some this is actually quite rare, despite what the media and all the negatively focused blog writers may suggest. So, while such people should be avoided like the plague, a greater focus should be on the identification of individuals or organizations who are not evil, but may nonetheless fail to seek the absolute best result for those they have been entrusted to serve. Luckily, a bit of information and some common sense can help ferret out these issues.

At a minimum, you should ask whether the third party will unequivocally recognize their status as a fiduciary. If not, ask why. If they expressly accept fiduciary status, and you're dealing with a qualified retirement plan that is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), make sure they accept fiduciary status under ERISA and not just under the securities laws, because ERISA imposes stricter standards. You should also ask for a copy of their Form ADV Parts I and II. If they do not have these disclosures, you should ask why. If they do, you should read them and pay particular attention to any disclosed conflicts of interest and compensation arrangements. Additionally, ask for a chart that reflects their corporate ownership and organizational structure as well as an explanation of any affiliations that they have with unrelated parties. Lastly, ask for, and follow up with, references from similar clients.

Avoid conflicts of interest completely if you can, because, if a problem arises, the existence of the conflict is rarely an issue for the conflicted party, but is almost always a problem for the party that failed to identify the existence of the conflict or simply disregarded it.

erms: "Is the price for the services being offered reasonable, given the service provider's qualifications and your particular needs?" Once you have gone through the four steps above, you should have a good understanding of the value being provided. It is at this point, and only at this point, that you can objectively evaluate and compare competing service providers. All too often, fiduciaries start with price and focus on the Terms without ever fully evaluating the relative strengths (the Talent, Tools and Trustworthiness) of their investment advisor. Don't make this mistake.

Remember, you may not always get what you pay for, but you almost never get what you don't pay for. So, if a deal seems too good to be true, be careful. For years, many retirement plan fiduciaries actually thought the administration and management of their multimillion or billion dollar plans was free, as if these large financial organizations were some sort of charity that provided this service out of the goodness of their heart. Many of these same plan fiduciaries have now learned -- the hard way -- that ignorance is not bliss. Instead, it's a recipe for disaster and good way to find yourself named in a lawsuit

If you follow the five "T's" above, whether you're evaluating a lawyer, a plumber or an investment professional, you're more likely to find a quality service provider who can satisfy your needs at a reasonable price. In the employee benefit context, and more specifically regarding investment matters, you'll likely find that the cost of engaging a qualified un-conflicted independent investment advisor will ultimately pale in comparison to the cost of litigation if you end up having to defend your decision to hire someone who lacks the requisite Talent or Tools, or possesses conflicts of interest that renders their advice suspect and less than Trustworthy.

The authors are expanding their discussion of the "Five T's" in a series of articles which, as published, will be linked to below.

The "First T" - Time

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