April 29, 2009

Fiduciary Loyalty

From time to time we refer to "fiduciary service providers," implicitly contrasting such providers with their non-fiduciary counterparts and competitors. As we see it, fiduciary status isn't just a legal distinction; it's a set of core principles, a worldview that guides individuals and firms in the marketing and delivery of financial services.

In a recent issue of InvestmentNews, Fiduciary360 CEO Blaine Aikin noted that "Fiduciaries owe a duty of loyalty to the beneficiaries they serve. But frequently, they find their commitment to the principle of self-sacrifice tested by conflicts of interest." To advance his argument, Aikin cited recent GAO research on conflicts of interest in traditional pensions and 401(k)-style retirement plans. Here's a summary of GAO's findings:

[O]ur econometric analysis using ongoing defined benefit (DB) plans and Securities and Exchange Commission (SEC) study data on pension consultants registered as investment advisers, who adequately disclosed their conflicts of interest and those who did not, detected lower annual rates of return for those ongoing plans associated with consultants that had failed to disclose significant conflicts of interest. These lower rates generally ranged from a statistically significant 1.2 to 1.3 percentage points over the 2000 to 2004 period.

Though GAO's analysts crunched numbers on defined-benefit plans, their findings apply to the defined-contribution (DC) world as well:

[B]ecause the risk of investment is largely borne by the individual participant in DC plans, participants are vulnerable to any decision, including those involving conflicts of interest, that could result in higher fees or other outcomes that can lower investment returns for participants. Given the multiplicity of parties involved in today's 401(k) plan arena, many opportunities exist for business arrangements to go undisclosed. Problems may occur when pension consultants or other companies providing services to a plan also receive compensation from other service providers. Without disclosing these arrangements, service providers may be steering plan sponsors toward investment products or services that may not be in the best interest of participants.

As Aikin notes, the best option by far is for service providers to avoid conflicts of interest in the first place. If such conflicts exist, he concludes, "anything less than full disclosure is unacceptable." Indeed.

Sources

Blaine F. Aikin, "For Fiduciaries, Loyalty is Everything," InvestmentNews, April 12, 2009

Charles A Jeszeck, "Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans," Government Accountability Office, March 24, 2009

Apr 29, 2009 6:37:32 AM | Retirement Plans, Wall Street

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