Roland|Criss Blog

A Firm Foundation

“Outstanding!” said Phil Melberg of Roland|Criss’ Foundation Roundtable in Washington, D.C. on December 9^th.

To all the panelists and participants, please accept our deepest appreciation for your contribution to the Washington, D.C. Foundation Roundtable. Your participation was invaluable. We are excited to walk this path with you, defining industry standards, interpreting best practices, and measuring results in an effort to excel in our fiduciary roles. What's next? In response to an overwhelming acceptance of the IFLC Foundation Standard, we are planning a follow-up event scheduled for February 17, 2011 in Washington, D.C. For those of you who were unable to join us, this will be a wonderful opportunity to contribute to standards development, enhance your awareness, and network with colleagues. What we heard from you… Standardized fiduciary practices will benefit the foundation community. Most believe that regulatory enforcement will increase. Many foundation executives are unclear about UPMIFA's requirements for fiduciaries. Fiduciary best practices would help your organization in the areas of governance, administration, and controls and practices. Fundraising and development would be enhanced if a foundation can demonstrate adherence to a fiduciary standard.

For more information visit us at www.rolandcriss.com or contact us at admin@rolandcriss.com.

Fiduciary Training - December 9, 2010

How to perform and supervise fiduciary activities with confidence and safety.

Learn fast, easy-to-use tools and techniques to transform unproductive confusion about the demands on fiduciaries into predictable outcomes. This seminar equips you with the most effective tools to satisfy the changing fiduciary requirements of the Employee Retirement Income Security Act ("ERISA") and their effect on what you should do.

View the extended seminar outline.

Mission and Purpose

The Stewardship Development Center seeks to build a fiduciary community committed to excelling in the fiduciary role, leading through stewardship principles, and exemplifying these tenets through real-world practices.

To Lead or To Be Led

by Michelle Sly-Laughlin
Regional Director - East, Roland|Criss       

While attending the Council on Foundation's Conference on Investment Management for the Future, a participant posed a question, she asked “what increased level of responsibility do endowment and foundation executives have to demonstrate prudent investment decisions given the massive amount of dollars that they collectively invest in the market.”  In essence how do we minimize the risk of future market scandals?

As the fog begins to lift from the market scandals over the past two years, the answer should be clear: foundation executives should consider reforming their stewardship game plan to demonstrate increased vigilance in their fund strategies, policies, and fund manager performance measurements.

It occurred to me that many of these endowments and foundations depend on their investment advisors and investment managers to execute their investment strategies.  Based on what we’re hearing from the foundation executives, the time is now for them to mount a pursuit of excellence and impose new standards among advisors and managers. 



It’s Not Only Stupid, It’s Dangerous.

by Ronald E. Hagan 
CEO, Roland|Criss

 

The results of an eye-popping survey* conducted by consumer groups, financial planning organizations, and an association of states’ securities regulators were announced this week.  The survey revealed that investors are oblivious to the vast differences in legal standards among the various classes of “investment advisors.”

  

 What’s wrong with this picture?  While nearly all of the respondents (97%) believe that stockbrokers, investment advisors that serve pension plans and foundations, and insurance agents should put investors’ interests first (the “fiduciary duty”), very few of them said they know that various laws say otherwise.

  

For example, sixty percent of the investors surveyed said they thought insurance agents had to uphold a fiduciary duty, which isn’t true, even though ninety-six percent said the fiduciary requirement should include insurance agents that sell annuity-based products.  (It’s no surprise that insurance agents are the most outspoken opponents of the government’s current effort to make a universal fiduciary standard apply to all investment advice givers.)

 

More Evidence of Confusion

 

Thirty-four percent of the investors surveyed believe that investment advice is the number one service provided by stockbrokers.  The law under which stockbrokers are licensed defines their primary role, however, as buying and selling stocks and other securities, with no requirement that they place their clients’ interests first; no fiduciary duty here!

 

Seventy-seven percent of respondents admitted they knew that registered investment advisers ("RIA") are licensed under a federal fiduciary standard.  Most respondents did not realize, however, that RIAs’ can escape consequences if they can get their clients to retain “full discretion” over investment decisions.  (This is the common practice among RIAs in the pension and foundation arenas.)

 

The Laws are Stupid and Dangerous

 

The survey proves what many experts in fiduciary standards already knew…investors have been bewitched by unfair sales tactics and bewildered by contradictory claims made by competing investment advice providers.  When the truth emerges, many investors feel stupid…some even angry.  Investors are not stupid, though.  The same cannot be said about the laws that empower stockbrokers, RIAs, and insurance agents to ply their trade.  Not only are the laws stupid, they are dangerous.  The danger lies in the widespread, but wrong assumption held by many pension and foundation executives that their investment advisor carries the fiduciary burden.  Many executives are finding out about the error in their assumption, the hard way.

 

Here’s How You Can Make Your Fiduciary Job Safer

 

In January 2011, the U.S. Securities and Exchange Commission will appear before the U.S. Congress to ask for an addition to the new financial services law.  The SEC wants a universal fiduciary standard to be added to the law.  The amendment will embrace any person or firm that delivers investment advice; pension consultants, RIAs, stockbrokers, insurance agents, and financial planners.

 

As you might guess, the investment advice providers are up in arms over the SEC’s initiative.  They have been fighting for position for months.  Pension plan sponsors and foundations have been mostly silent.  Why?  There are two likely reasons: (1) the vast majority of investment advisors benefit from the current state of confusion among investors and are content to let their clients' remain out of touch with the fiduciary debate, and (2) the fiduciary interests of plan sponsors and foundations are not well represented at the regulatory level.

 

You should be counted on this issue.  Send a comment to me on this Blog and I will see to it that your voice is heard when the Congress begins debating the issue.

 

*The Survey

Conducted by Infogroup Inc., which provides market research services, the survey tested the reactions of nearly 1,400 people that defined themselves as investors.  The survey’s sponsors included AARP, CFA, Certified Financial Planner Board of Standards, Inc., Financial Planning Association, Investment Adviser Association, National Association of Personal Financial Advisors, and the North American Securities Administrators Association, which developed the Uniform Prudent Investor Act (“UPIA”).

Getting Ready for the DOL’s New Fee Disclosure Rule: A To-Do List for ERISA Plan Sponsors

by Ronald E. Hagan
CEO, Roland|Criss

Some ERISA pension plan sponsors are preparing for their first compliance audits under the Department of Labor’s new Regulation 408(b)(2).  So far, the picture is not pretty.

 

The Regulation requires mutual fund companies, hedge fund managers, investment advisors (they use a variety of titles like pension consultant, financial advisor, and insurance agent), third party administrators, and other “covered service providers” to disclose their fees in more detail to ERISA plan sponsors than ever before.

 

For their part, executives that manage their companies’ pension plans are required to analyze the fee disclosures and judge if they are reasonable.  Since the consequence for not complying with the Regulation is severe, a yearly audit conducted by a firm accredited to conduct such audits, which does not provide any of the services listed above including a plan’s financial audit, is essential.

 

Based on what I’ve seen up to now, ERISA plan sponsors are in for a tough time meeting the Regulation’s requirement.  Nine out of ten ERISA plans that Roland|Criss has seen have no plan for (or idea on) how to figure out if the fees they pay their service providers are reasonable.

 

If the early results are any indication of the state of affairs across the ERISA community, then executives that serve as their companies’ pension fiduciaries need a refresher on how to check their vendors’ fee arrangements.  Here is a quick-reference to-do list for ERISA plan sponsor fiduciaries:

 

1.    Locate your original file copies of contracts with all vendors (a simple, but often difficult task, especially if you’ve been working with the same vendors for years);

2.    Calculate the fees that are deducted from plan assets to pay service providers (and if you don’t know how, call an independent third party to help you);

3.    Work to segregate the information that your service providers are providing you between information that really reports on their fee structure, and just investment returns or other superfluous reports;

4.    Identify whether you are utilizing one vendor for multiple services and thus are subject to potentially damaging conflicts of interest (this is a really big legal problem for ERISA fiduciaries); and

5.    Track and record how and when you evaluated the quality of your vendors' services against the fees paid in order to minimize your legal risk.

 

It doesn’t take much imagination to see that a lot of companies that sponsor ERISA pension plans have not been given the tools to understand how to check their vendors’ arrangements, or have not seen the importance in doing so.  The new regulation prompts all ERISA pension fiduciaries to learn (and quickly!) how to understand fee disclosures and prove that vendors’ fees are reasonable.  

The Accidental Fiduciary

POINT OF VIEW:  How a Professional Fiduciary Sees It 

by Ronald E. Hagan
CEO, Roland|Criss

One morning my phone rang and the caller was the chairperson of his company's committee that oversees its 401(k) and defined benefit pension plans.  He explained how his committee's members were trying to clear up confusion about which of their service providers were actually on the hook as fiduciaries to the plans.

Concerns developed when a member of the committee realized recently that one of the plans' pension consulting firms was not a fiduciary under the Employee Retirement Income Security Act ("ERISA") because it would not accept ERISA's designation as an "investment manager."  While the consultant disclosed that it was a fiduciary under federal securities law, its refusal to accept ERISA's fiduciary definition left the committee lacking protection it thought it had hired.  (The key threat of litigation for the committee members is based on ERISA, not securities laws.)

The situation led the group to question what their vendors' "co-fiduciary" claims were actually worth.  The unfortunate thing about the committee's dilemma is that ERISA plan sponsors were never intended to "carry the stone" for such matters in the first place.  When the caller asked for my opinion, I had this to say to him.

The Intended Fiduciary Model

When enacted into law, ERISA expected that employee benefit plans qualified under its rules would be managed by professional fiduciary organizations; not by the businesses that sponsored them.  In other words, 401(k) plans, ESOPs, defined benefit plans, and other ERISA programs were to be turned over to highly specialized firms that did nothing else but carry the fiduciary stone.  These outsourced fiduciaries discharge a plan sponsor's responsibility and risk.  They hire and fire service providers, ensure that fees deducted from workers' accounts are proper, and are equipped to go toe-to-toe with anyone that has interests that conflict with the duty of exclusive loyalty to participants.  The intended model never expected that a plan sponsor's directors, executives, and managers would be put in harm's way.  Unfortunately for the executive who called me, his committee was unaware of ERISA's intention and was operating in do-it-yourself mode.  Their situation is all too common.  It makes many executives "accidental fiduciaries."

The Unintended Consequences

The caller's committee's approach has it dazed and confused about how to be sure it satisfies ERISA's rules for service provider selection and monitoring; conflicts of interest resolution; investment selection and monitoring; and earning the exemption from liability for bad investment decisions made by the plans' participants.  The plan sponsor's decision to put the responsible party tag on each committee member left them to figure out on their own the fiduciary claims of the investment firms, outside trustees, custodians, and administration vendors that serviced the plans.  All in all a tall order for accidental fiduciaries.

A License Alone Doesn't Make a Good Plumber

The caller's situation reminds me of the plumber that I called to fix a slow drain in my shower.  Wanting to do the right thing, I was sure to call only a licensed plumber.  The candidate looked at the situation and told me that my "P-trap" was broken.  He said it was it was embedded in concrete and the work to fix it would be major.  His quote to fix it was $5,000.  Naturally, I was shocked and wondered how such a repair could cost so much, but, hey, the guy was licensed so I thought he must be right.

Just as I was about to call and give him the green light to proceed, a friend of mine, who manages big commercial buildings, called me.  After telling him about the plumber's diagnosis and cost estimate, he told me to wait for a couple of days.  He sent one of his men to see the problem and came up with a completely different diagnosis and cure.  I told him to proceed immediately, which he did.  He fixed the problem in less than an hour at a total cost of only $175.  If I had not encountered my friend who works with plumbers every day, I probably would never have known that I paid for a P-trap that I didn't even need.

As I told the pension executive who called me, don't be misled by every fiduciary claim made by vendors to whom the word "fiduciary" barely applies, if at all.  Hire a professional who works with "plumbers" every day.  It's not too late!  learn more>

 

Is the Fox Selling Chicken Wire to the Hen House?

Ronald E. Hagan
CEO, Roland|Criss

The overarching job of the board of directors of a company that sponsors a retirement plan is to ensure a safe environment for its employees' nest eggs.  Most executives that directly oversee such plans want help performing the duties defined by various laws, court cases, and industry best practices.  In the past, board members, financial executives, and human resource managers that serve as pension fiduciaries have looked to providers of investment products and advice as their “trusted advisor” for such help.

In truth, investment providers do not all deserve the same level of confident reliance as trusted advisors.  For example, insurance companies are not legally bound to comply with any defined fiduciary law.  The same is true of securities firms that sell stocks, bonds, and mutual funds.  Only investment providers that are licensed as Registered Investment Advisors bear any semblance of accountability to a fiduciary standard of care.

This is important; a Registered Investment Advisor’s inherent accountability is to a specific securities law, but not to any pension law.  Many executives who manage retirement plans are easily misled into thinking that a Registered Investment Advisor is a “co-fiduciary.”  Such thinking has caused thousands of primary fiduciaries to believe that they are relieved of their investment decision making risk just because an advisor claims co-fiduciary status, when nothing could be further from the truth.  Scores of court cases in this decade prove it.

Last week’s decision in the U.S. Senate to trash a proposed rule that would have placed all investment providers under a common fiduciary roof is bad news for retirement plan sponsors.  The rule would have imposed on insurance agents, stock brokers, and Registered Investment Advisors alike, a pension connected fiduciary standard.

The financial reform package introduced last week by Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, dropped an earlier provision that would have imposed a fiduciary duty on anyone offering advice on investments, dealing a blow to boards of directors, financial officers, and human resource executives.  After studying the arguments that led to Senator Dodd’s decision, it is clear that misleading arguments put forth by the insurance industry caused him to back off.  What does this mean for you?

You need to evaluate the practices and influence that your plan’s investment provider exerts on your decision making.  The provider may be an insurance company, a Wall Street securities firm, a Registered Investment Advisor, or even a third party administrator.  The U.S. Senate just gave all of them a permanent license to keep making chicken wire for your hen house!

The holes in the chicken wire are easily identified by a firm that audits investment firms.  Just be sure you don’t employ an investment firm for the task.  The safety of the nest eggs you are responsible for is at stake.  Federal pension law puts your personal net worth on the line, too.

Improved Systems Can Enhance Foundation Outcomes

Ron W. Hagan

 

Stephen Covey, commenting on the difference between managing and leading, said, “Management works in the system; leadership works on the system.”  How would you define your role as a trustee of a foundation – manager or leader?  Some might say managers; others might say leaders.  Is there a right answer? 

Investment Firms and Third Party Administrators Get Proof of Trust

Jan Salzar

In an era of financial industry scandals, trust in firms that provide investment advice, manage mutual funds, and perform recordkeeping functions, is more important than ever.  Pension plan sponsors and charitable foundations are on a regulatory enforcement and litigation hot seat unlike any before.  Being confident that you have chosen vendors that you can trust is critical to your personal safety and the success of the investment program that you manage.

Roland|Criss offers rating and certification programs that build trust between service providers and their clients.

As the global leader in certification assessments, Roland|Criss is helping investment advisors, recordkeepers, investment stewards, investment managers, and trust companies prove that they conform to the highest standard of fiduciary and fiduciary support excellence.  Substantiated by federal and state laws, industry best practices, and legal precedents, the certification process uses the ISO 19011 audit methodology

The Fees Paid by Nearly All 401(k) Plan Participants are Excessive

Ronald E. Hagan

An industry wide study recently completed by the Investment Fiduciary Leadership Council ("IFLC") reveals that participants in most 401(k) plans are being socked with charges that exceed the value of the services they receive.  The findings confirm that 401(k) plan sponsors, and their employees who serve as fiduciaries on their plans, will not pass the Department of Labor's "fee reasonableness" audit.  This spells big trouble for primary plan fiduciaries.