What is a fiduciary and what does it mean for your retirement plan?
Along with continuous advances in health care, human life expectancy seems to be rising ever higher. Living to one hundred may soon become a common occurrence as opposed to a marvel of longevity. With the blessings of long life, however, comes the challenge of saving enough to fund a lengthy retirement.
In anticipation of this challenge, many employers and plan providers are developing innovations geared towards improving retirement outcomes for plan members. Online tools, target date funds, and auto enrollment features are all examples of recent developments aimed at improving participation and engagement levels. Yet one of the key ingredients needed to improve plan outcomes is often left out of the equation. That ingredient of course, is fiduciary duty.
What is a fiduciary?
A fiduciary is an individual or an organization bound by the obligation to serve the best interests of a beneficiary. A fiduciary relationship thus implies trust and a duty of care. This concept in common law can be traced back to Medieval England where at the death of a landholder, an underage heir would be placed under the wardship of his feudal overlord (Seipp 1014). Such a guardian was responsible for maintaining the property of the heir until he came of age, and in doing so, was expected to exercise a duty of care.
In the modern sense, a fiduciary is anyone who is responsible for managing the assets of another individual or institution. Having such a major influence on the welfare of others, a fiduciary thus has “an ethical and legal duty to act in the best interest” of those whose assets they are managing (Eckler 2). In such a relationship, there can be no place for conflicts of interest that could undermine a fiduciary’s ability to discharge their duties effectively.
Fiduciaries in retirement plans
This brings us back to retirement plans. Under common law, any employer that sponsors a retirement plan such as a group RRSP or DCPP is considered a fiduciary, and is thus obligated to act in the best interests of their plan members. Although the level of fiduciary responsibility may vary depending on the nature of a plan, it would be perilous for plan sponsors to make light of their status as a fiduciary.
In their capacity as a fiduciary, plan sponsors are expected to take steps to ensure that employees are placing their savings in suitable investments that correspond to their risk profile. Regular monitoring of plan performance is key, and so is ensuring that fees remain competitive and fully disclosed. Maintaining clear communication with plan members is also of paramount importance.
Absence of fiduciary duty
Unfortunately, many RRSP and DC plan sponsors today are not fully aware of the fiduciary duty they owe to their plan members. A very common misconception is that so long as employees have the freedom to select their own investments, plan sponsors are then freed from any fiduciary responsibility. This is certainly not the case.
That being said, it should be noted that many employers simply do not have the administrative capacity or financial knowledge needed to administer a plan effectively as a fiduciary. In those instances, sponsors often rely upon their plan provider to assist employees in the investment selection. Unfortunately, major providers such as the large banks and life insurance companies generally do not uphold fiduciary duty towards plan members. In fact, the commission structure underpinning their service models often incentivizes their advisors to recommend the funds that compensate them the most as opposed to those best suited for the plan members.
Fortunately, there is an alternative for plan sponsors. One only needs to look beyond the traditional players in the group retirement space.
A third-party fiduciary can be brought in to provide Investment Management services for the plan. Rather than promote proprietary funds and conflicts of interest, such a fiduciary would take on the responsibility of managing the assets on behalf of plan members on a discretionary basis. Under this model, no proprietary investments or embedded commissions would be accommodated. And plan sponsors for their part, would benefit from having a trusted partner to help shoulder their fiduciary burden.
As employers continue to face mounting challenges to ensure their employees have enough money to retire, such support can be of critical importance.
Open Access is a discretionary manager of group retirement plans. Being a fiduciary, we are legally and structurally bound to act in the best interests, and only the best interests, of plan members. This means no proprietary products, no conflicts of interest, and no hidden fees.
Seipp, David J., Trust and Fiduciary Duty in the Early Common Law, Boston University law review v.91 May 2011
Eckler Ltd, 2015 Eckler CAP Legal Forum: Legal pitfalls of today’s CAP trends, January 2016