Westminster Consulting Brochure Defined Contribution | Page 18

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?
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.
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 sufficient justification for working without a fiduciary advisor. For most
committees, however, working with fiduciary advisors is often a best practice, designed to
promote conflict-free advice and the best possible outcomes.
For retirement plans that fall under the auspices of ERISA, or foundations or endowments
which follow UPMIFA, the harm is more obvious: the law is being broken. The fiduciary
requirement exists for the ultimate benefit of plan participants.
“A fiduciary’s independent investigation of the merits of a particular investment is at the heart
of the prudent person standard. [Fink v. National Savings and Trust Company, 772 F.2d 951,
957, 6 E.B.C. 2269(DC Cir. 1985)]”
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.

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