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The Fiduciary State of Confusion: The Saga Continues

By Neal Shikes, CRPC®

    

The US Department of Labor, Employee Benefit Security Administration (EBSA) is responsible for the enforcement of ERISA. Trust Law is instructional to ERISA and why wouldn't it be as the relationship between a Plan Sponsor and participant can only be characterized as a fiduciary one given the required duties that is owed to the participant by the Plan Sponsor. In fact, the required skill-sets to fulfill these duties almost guarantees the existence of a sophistication imbalance between Fiduciary/Sponsor and participant.

Sophistication gaps always cause vulnerabilities because one can potentially take advantage of another and cause harm. There is an ethical element to this that seems to be absent in many dialogues with regards to this subject that is inevitably inescapable but is rather hard to grasp because its obligation was not created by a contract. If the obligation was not created by contract, then how can outcomes that result from behaviors determine its breaches? The chef's ingredients or cooking methodology determines the food's flavor.

One should not forget, when parties negotiate contracts they do so to fulfill their own needs which is the antithesis of a fiduciary relationship. A photographer must have several lenses at their disposal to adapt to the environment and give them different perspectives on what's being viewed. Though neither a photographer nor attorney, I often wonder if ERISA and fiduciary responsibility are often viewed through the wrong lens. Perhaps to arrive at simplicity on the other side of complexity, the lens of comprehension should be the Law of Obligations.

This lens seems to bring clarity to the obligations that a Plan Sponsor/Fiduciary has to plan participants as well as actions that must be refrained. Certainly, there must be an attempt to remove all conflicts of interests and when the methodology reveals that there may be a conflict of interest, it must be voiced to the participants but not as an attempt to dismantle the fiduciary relationship and the duties owed; prudence and loyalty.

A Plan Sponsor/fiduciary is bound by the fiduciary duties of prudence and loyalty, so they must have methodologies in place that provide visible evidence of their behaviors. Why would this be any different between a broker/investment advisor and a person seeking advice about how they can grow their retirement savings or annuitize it in a way that maintains a lifestyle that suits them? One party is vulnerable to another, one party can inflict damage on another, and certainly one party is compensated for giving advice, in the form of a product or strategy, to another. Is this not a fiduciary relationship created by the required behaviors to fulfill the deed? ERISA provides fiduciary responsibilities for those who manage and control retirement assets so one may find it hard to grasp why retirement assets outside Employer Sponsored Retirement Plans aren't included. Isn't a cookie with raisins in it, instead of chocolate chips, still a cookie?

The Fifth Court of Appeals believes that the DOL's fiduciary rule expanded the reach of ERISA's fiduciary standards and the class of advisors it regulated. Wait, what? Doesn't the required skill-sets to help someone achieve their retirement goals create a sophistication imbalance, the sale of products or strategies that create compensation, and the investor's vulnerability and potential for loss make this relationship a fiduciary one? The required duties and behaviors spell the fiduciary word using the same number of letters, so the rule wasn't expanded. It's being enforced and that scares many actors in this play. Why do the actors of this play get to shop for a positive review or a court until they find one that likes their performance at the expense of the audience, you know, the ones that actually pay for the tickets?

No court decision should enable and fuel such an imbalance of power especially when one party seems so inherently vulnerable. This seems to be the antithesis of the spirit of the Constitution and those who have sworn to "administer justice" and "support and defend it."

Neal Shikes has been a Registered Financial Services Industry professional for over 20 years and a Chartered Retirement Planning Counselor, CRPC®. He is also the "Willing Fiduciary" (http://willingfiduciary.com/) associated with Counsel Fiduciary LLC (http://counselfiduciary.com/) and the "Trusted Fiduciary" (http://www.trustedfiduciary.com) and principal associate for Thornapple Associates a provider of Expert Witness Services (http://thornapple.net/).

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