Westminster Consulting Brochure Defined Contribution & Defined Benefit | Page 20

The conflict-of-interest inherent in a non-fiduciary advisor
conducting fiduciary tasks can easily become the basis of a lawsuit
against any decision makers or fiduciaries working for the benefit
of the plan.

THE ROLES OF A FIDUCIARY ADVISOR
VS. A NON-FIDUCIARY ADVISOR
Thus far, we have looked at the relative benefits of working with a
fiduciary advisor and the potential hazards of working with a nonfiduciary advisor. This raises the question: is there any advantage
of working with a non-fiduciary advisor?
The short answer is “yes”. To begin with, a non-fiduciary advisor
may be a specialist in their particular field. Returning to the car
salesman example, a salesman may know the history and subtleties
of every car on their lot and they could provide a lot of useful
knowledge about their own products. Similarly, a spokesman for
ABC’s Mutual Fund Company may have accumulated a great
deal of knowledge and experience about their products and how
to integrate their product suite into an effective retirement plan
lineup. Fiduciary advisors may take advantage of this expertise
by inviting product specialists to discuss their particular suite of
products. However, the fiduciary has to look at a broad pool of
investment options in order to fulfill the duties set forth under
ERISA. Missing options which apply to individual investors is
done with a certain amount of risk for fiduciaries and the courts
have upheld their liability, especially when they have failed to seek
outside professional advice.
“A trustee’s lack of familiarity with investments is no excuse:
under an objective standard, trustees are to be judged according to
the standards of others acting in a like capacity and familiar with
such matters. [Marshall v. Glass/Metal Association and Glaziers
and Glassworkers Pension Plan, 507 F. Supp. 378, 2 E.B.C. 1006
(D. Hawaii 1980)]”
The non-fiduciary, subject to the lesser suitability standard can
become a greater expert on certain specific investment options due
solely on the fact that they do not have a duty to find the best option
and can therefore limit their search. Ironically, the limited search
may actually yield the best option for the investor client!
For employer retirement plans, like a 401(k), there is another area
where the roles of fiduciary and non-fiduciary advisors are distinct:
investment advice vs. education. Imagine an employee at John
Doe Computers, Bob, wants to know how to invest his 401(k)
savings. Specific recommendations given to the employee (i.e. –
“Bob, we’ve had a one-on-one discussion and I think you should
put 50% of your money in this equity fund, and 50% in this other
fixed income fund”) is considered investment advice. Investment
advice given to employees (i.e. plan participants) is solely the
purview of a fiduciary advisor, and the recommendation a fiduciary
advisor provides to employees is subject to fiduciary responsibility
and potential liability.
A non-fiduciary advisor cannot give specific recommendations to
employees. On the other hand, a non-fiduciary advisor can provide
education and guidance. So, Bob can call up the investment hotline
at ABC Mutual Funds and get investment education. Bob can

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receive general information about types of risk (market, inflation),
compounding interest, risk tolerance levels & hypothetical asset
allocation models, and so on. This general education gives tools
to employees to make their own investment decisions, so is not
subject to the fiduciary standard. As a result, the liability to the
employer is significantly less.
Another perceived benefit non-fiduciaries have which fiduciaries
do not possess is with regard to the perception of “self-serving”
transactions under ERISA and therefore the non-fiduciaries are
exposing the employers to less liability than the fiduciaries.
“A fiduciary with respect to a plan shall not –
Deal with the assets of the plan in his own interest or for his own
account;
In his individual or in any other capacity act in any transaction
involving the plan on behalf of a party (or represent a party) whose
interests are adverse to the interests of the plan or the interests of
its participants or beneficiaries, or receive any consideration for
his own personal account from any party dealing with such plan
in connection with a transaction involving the assets of the plan.”
[ERISA Sec. 406(b)]”
Let’s go back to our car salesman illustration to demonstrate how
a “self-serving” transaction might still work in the client’s benefit.
Imagine that you are ready to buy your car, but you don’t have
enough money to purchase your car outright; you’ll need some
short term financing options. A car salesman would be happy to
offer you financing, but no fiduciary could ever offer to loan you
money to purchase a product. A fiduciary might be able to research
different loan offers and recommend a particular deal, but the car
dealership could actually provide the financing directly and they
may even offer a competitive rate given their desire to sell the car.
Let’s apply this illustration back to the world of investing: imagine
you run a foundation with a high annual spending requirement to
maintain a favorable tax status. Now, imagine it’s 2008 and th