Westminster Consulting Brochure Defined Contribution & Defined Benefit | Page 19

[ERISA Sec.404 (a)(1)(B)]
An advisor who adopts fiduciary status bears a burden similar to
the institutional trustee; they must act with undivided loyalty to
the interests of the owners and avoid (or disclose) any possible
conflicts of interest. This is the fiduciary standard.
Conversely, non-fiduciary advisors are subject to a lesser burden:
the suitability standard. Legally, this often means that the financial
advisor is required to offer an individual investor options which
only meet their needs based upon their particular circumstances.
Advisors may select products or services that are “suitable” for the
client, but not necessarily the best choice.
“A fiduciary … may employ one or more persons to render advice
with regard to any responsibility such fiduciary has under the plan.
[ERISA Sec. 402 (c) (2)]”
However, recent court decisions point to a more vigorous
monitoring of the choices being offered by these non-fiduciaries.
In other words, the investment choices being given should be more
suitable for the client(s) and less self-serving to the non-fiduciaries
and the companies they serve. Closer scrutiny is being paid to these
transactions which both buyers and sellers should start paying
closer attention to moving forward.

The car salesman will show you cars that go from point A to point
B; he may show you suitable options. However, he has a vested
interest in higher commissions, or perhaps moving particular
models that aren’t necessarily your ideal selection.
From a broader perspective, imagine that this particular used car lot
has your dream car with everything you want. The only problem
is a competitor’s car lot across the street has the exact same vehicle
for $5000 less. A salesman following the suitability standard has
no obligation to tell you about the cheaper dream car across the
street; his interest is selling the car from his own dealership and
certainly your dream car is a suitable choice. Even more insidious,
the salesman simply may not know about better options outside
of their own car lot; their job is to sell cars, not to know about the
entire universe of options.

WHERE IS THE HARM?
Now, apply this illustration to the context of investments. Imagine
you are an employer – John Doe Computers - with a 401k retirement
plan and that you’re working with ABC Mutual Fund Company
to run the recordkeeping, participant education, and investment
management services. ABC Mutual Funds are the only allowable
investments in the retirement plan.
So, John Doe Computers only receives recommendations of
which ABC Mutual Funds to include in the retirement plan, but
with tens of thousands of investment options available, how can
the employer know that ABC funds are the best options for their
employees? Alternatively, imagine that the ABC investment family
of products don’t pass any fiduciary standard (e.g. – they’re more
expensive than peers, all of their portfolio managers and analysts
were replaced, risk adjusted returns are terrible, etc.).
Imagine that ABC is charging too much for recordkeeping, but they
won’t bring these issues to John Doe Computers’ attention. The
employer might never know about these failings because there is a
conflict of interest; ABC simply won’t fire themselves and it falls
on the board or a fiduciary advisor to properly vet their advisors.

Example: Buying a Car
It might be useful to think of a car salesman as following the
suitability standard. Imagine you walk onto a used car lot and
talk to the salesman on duty to show you a few cars; the salesman
will show cars, but they get to choose how to sell them. Do they
show you a selection of sporty cars with high markups? Imagine
that this particular salesman is the head of the Model Ts and they
are compensated based on the number of Model Ts sold, but not
Saturns; might they try and steer you towards a particular brand or
model? Is there an unreliable Edsel that the car dealership is trying
to get rid of, such that they are willing to give you a bargain?

For non-qualified plans- the harm of operating without fiduciary
coverage is more subtle. Certainly, the committee members and
other fiduciaries working on behalf of the plan have been entrusted
with fiduciary duty, but their advisors are not always required to
share this burden. If a committee is made of lawyers and accredited
fiduciaries and they have borne the responsibility for governance
review, investment manager due diligence, peer review, and so
on, they may have s