Experiential Wealth, Inc.
Experiential Wealth, Inc.
Experiential Wealth, Inc.

The ERISA Fiduciary Standard Is Not Marginalized

Nov 21, 2011 | Institutions, Opinions, Plan Sponsors

Matthew D. Hutcheson, a strong advocate for ERISA fiduciary excellence, has allegedly breached his duties as an Independent Fiduciary to a number of retirement plans that he serves.  According to the January 17, 2010, press release of the Independent Fiduciary Training, LLC.: “Matthew D. Hutcheson is a professional independent fiduciary and the leader of the Independent Fiduciary movement. Mr. Hutcheson founded Independent Fiduciary Training, LLC as an organization dedicated to teaching professionals how to be Independent Fiduciaries. The mission of the Independent Fiduciary is to seek improvements to the quality of life for millions of Americans by applying sound principle and professional discipline to the management of a retirement plan.”  Mr. Hutcheson’s public passion has led to his testimony before Congress and the Department of Labor Employee Benefits Security Administration.

The November 20, 2011, InvestmentNews article1– “Probe of high-profile 401(k) fiduciary advocate could cost advisers business” suggests that the DOL investigation of Mr. Hutcheson “is raising fears that small businesses will shy away from offering plans or from turning to advisers.”  The article further went on to say that “[t]he DOL investigation is a concern to the retirement industry, as it comes at a time when regulators and legislators are preparing to clash over the Labor Department’s upcoming re-release of a rule that would expand the definition of “fiduciary” for retirement plans. As a result, some have questioned whether the investigation will set back efforts in the push for higher standards. Others expect greater skepticism and scrutiny coming from plan sponsors who are looking to hire an adviser or adopt a retirement plan.”

Regardless of the outcome from Mr. Hutcheson’s ordeal, it is a stretch to suggest that this one case is putting the brakes on for small employers to sponsor ERISA retirement plans or to use advisers.  Even if Mr. Hutcheson is found guilty of all the alleged malfeasance, breaches, indiscretions, fraud, poor judgments, and failures, such a case does not and should not have the purported impact.  To further suggest that this one case may negatively impact the much needed push for higher standard for investment advisers is that much more incoherent.  This line of thinking is either giving Mr. Hutcheson too much credibility or demonstrating a lack of understanding and appreciation for the fiduciary standard (either the best interest standard under the Investment Advisers Act of 1940 or the sole interest standard under the ERISA régime).  Bernard Lawrence “Bernie” Madoff, the disgraced Ponzi scheme operator that defrauded billions of dollars from investors, served as the Chairman of the Board of Directors and on the Board of Governors of the National Association of Securities Dealers (NASD), the predecessor to FINRA.  Does this mean that we should distrust every member of the FINRA board or to disband FINRA?  Madoff was held to a higher standard of trust.  In a position of power (real or imagined), he exploited the trust his investors bestowed upon him and his firm.  This example should not lead us to suggest that we as a society are so simple minded that because there are those who wronged us by exploiting our vulnerabilities we should tear down institutions and core values that protect us in a civil society.

Under a retirement plan, the plan sponsor or plan administrator is in a place of power and should be held to the highest standard.  Employees’ retirement assets, either through voluntary contributions or through employer contributions, are entrusted to the Plan Administrator.  As a fiduciary, the Plan Administrator has an obligation to meet the fiduciary standard promulgated under ERISA.  The basic obligation of a plan sponsor/plan fiduciary is to:

  1. Operate without conflicts. A fiduciary must discharge his or her duties in the “sole interest” of the participants and beneficiaries.
  2. Do what you say you will do. Maintain and adhere to an ERISA compliant written plan document and for the “exclusive purpose” of providing benefits to the participants and beneficiaries.
  3. Not put all the investment eggs in one basket. Invest or make investment options available that would minimize risk of asset loss through asset diversification.
  4. Clearly understand that it is somebody else’s money. A fiduciary has the duty to prudently select and monitor service providers and control plan expenses.

These four requirements are straightforward and reasonable.  Every investor (in this case a participant or a beneficiary to a retirement plan) should expect no less from any fiduciary (person in the position of trust) who has the discretion to administer or manage their money.

To provide further fiduciary guidance, ERISA Section 404 offers the Prudent Man Rule where a fiduciary must operate “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”  This principal based standard has been refined over the years and is now often referred to as the Prudent Expert Standard. In Marshall v. Snyder, the 2nd Circuit Court in 1978 recognized that the prudence standard “is not that of a prudent layperson, but rather that of a prudent fiduciary with experience dealing with a similar enterprise.” And in Donovan v. Cunningham, the 5th Circuit Court in 1983 stated that “a pure heart and an empty head are not enough.”  Most retirement plan fiduciaries do not believe that they have the skill or experience in serving as a “prudent expert” and rightfully elect to appoint professional investment fiduciaries to serve in that capacity. These investment fiduciaries, as so defined under ERISA Section 3(21) or 3(38), also have to adhere to the same set of standards.  In the case of Mr. Hutcheson, he created a multi-employer retirement plan scheme where the plan sponsor appoints him as the ERISA 3(16) Plan Administrator to have complete discretion over all administrative, management and investment fiduciary duties.  The purported benefit by Mr. Hutcheson is the complete transfer of responsibilities and liabilities to him and his scheme.  The problem with this approach is that the plan sponsor still has an obligation to prudently monitor the Plan Administrator – Mr. Hutcheson – yet give up all control of the plan. If Mr. Hutcheson is found guilty of the charges, there will be no question that he has fiduciary obligations to the plan. Thus the fiduciary and personal liability under ERISA Section 409 applies, but the plan sponsor may also share in the fiduciary obligation if the plan sponsor is found to have failed to have prudently selected and then prudently monitored Mr. Hutcheson, the service provider.

Having discretion over and managing other people’s money carries a heavy burden.  No law or rule can prevent any fiduciary from intentionally doing harm or failing to comply.  After all , any set of laws is to keep honest people honest and set the penalty so great that it discourages bad behavior.  If Mr. Hutcheson is found to have violated his fiduciary duties, although personally tragic, it would have no implication towards the need to raise (in the case of the SEC) or to expand the application of (in the case of the DOL) the standard for all fiduciaries who offer investment advice to the public.  In fact, the Hutcheson episode reminds plan sponsors to be better stewards and to prudently select and monitor all service providers and appoint fiduciaries.  Although appointing an independent Section 3(16) Plan Administrator may seem to make sense instinctually, independent checks and balances must also be installed to prevent concentration of authority and power.  Plan sponsors are dealing with other people’s money and as fiduciaries, one can never be careful enough.

The only two things I have learned from the developing Hutcheson story are 1) minimize the incentives and opportunities for anyone to take inappropriate courses of action and 2) trust but verify.  Strengthening and applying the fiduciary standard should be the battle cry of all investors.  They should expect the highest standard from their retirement plan investment advisors – without conflict and in their sole interest. Why should the Hutcheson story set back efforts in the push for higher and broader standards?

  1. http://www.investmentnews.com/article/20111110/FREE/111119992