All posts tagged fiduciary

Have you pondered why your employer chose the particular 401k platform with which you are saving for retirement? Your employer has a fiduciary duty to ensure that you are provided with a 401k product that offers you a reasonable opportunity to achieve retirement income security – you just need to fund it adequately!

We all have various duties, but it’s important to understand that your employer’s fiduciary duties are mandated by the Employee Retirement Income Security Act (ERISA). Fiduciary duties have been described as “the highest known to the law” and the individuals responsible for choosing your 401k platform can be held personally liable for any fees that are deemed to be unreasonable.  See Donovan v. Bierwirth, 680 F.2d 263 (2nd Cir. 1982) In fact the individual employees who served on the ABB, Inc. pension and benefits committee were recently found jointly liable, along with ABB, Inc., for $35.2 million because they failed to properly document and monitor 401k fees!

Despite the complexity of fiduciary duties, there is no mandatory training for fiduciaries. However, ERISA requires that if an employer doesn’t have the expertise to fulfill the highest duties known to the law, they must engage a qualified, independent expert – and here is where fiduciariness comes into play.

Truthiness, Fiduciariness and Lemoniness

Stephen Colbert coined the term truthiness which is defined by Miriam-Webster as “the quality of preferring concepts or facts one wishes to be true, rather than concepts or facts known to be true.”  In an excellent blog post Chuck Humphrey, Employee Benefits & ERISA Counsel for Fiduciary Plan Governance, LLC. applies truthiness to the 401k industry.

Humphrey is more direct than Colbert writing that “truthiness is a clever way of characterizing what is in fact lying…” and coins the word fiduciariness which more accurately describes the practices of some 401k plan vendors. He defines fiduciariness as “the selling by the financial service industry the concept or fact of assumption of fiduciary status to 401(k) plan sponsors who want it to be true, rather than it actually being true.” There are many employers who are, unknowingly, the victims of fiduciariness. They might have thought they engaged a qualified, independent expert when in fact they only hired a well-trained salesperson whose company rejects any fiduciary responsibility whatsoever.  To learn more about fiduciariness see The Wizard of Oz, Retirement Plans & You.

If your employer is the victim of fiduciariness, then unfortunately so are you. This is because those 401k vendors who practice fiduciariness, often sell what might be considered fiduciary lemons. Scott Wooley aptly describes these products in Retirement Plans from Hell . Simply, these are 401k products fraught with hidden, hard-to-find fees that pilfer away your 401k assets as well as your prospects of retiring with dignity. Just as truthiness is a euphemism for lying, pilfer is a euphemism for stealing – how else might one describe continuously taking small amounts of your 401k assets without your knowledge and consent?

If the Food & Drug Administration was responsible for regulating the 401k industry, these products might come with a warning label which read: This 401k product may be harmful to your retirement income security! However, there is no government agency responsible for regulating the marketing materials and representations of 401k vendors. Ironically, the regulator responsible for punishingfiduciariness is a private corporation, bought and paid for by Wall Street, and accurately described by Madoff whistleblower Harry Markopolos as a “very corrupt self-regulatory organization.”

Regrettably, lemoniness comes in too many varieties to discuss here; however, there is something that you can do. As of 2012, your employer must provide you with what is known as a Rule 404(a)(5) fee disclosure. Ensure you read it and if it isn’t clear to you exactly how much your 401k plan is costing you, demand an explanation from your employer who in turn should demand an explanation from your 401k vendor.  To learn more about how some 401k vendors intentionally hide how they pilfer your money See Rule 408(b)(2): The New Fiduciary Paradox .  If you don’t motivate your employer, no one else will and it’s your retirement income security that is at risk!

About the Author

Mark Mensack

 Mark Mensack, AIFA®, GFS® is the Principal of Mark D. Mensack, LLC., an independent fiduciary consulting practice affiliated with Fiduciary Plan Governance, LLC.. His expertise is in the area of fiduciary best practices, 401k hidden fees and ethical issues in the retirement plan marketplace. He has eighteen years of financial services experience; fourteen as a financial advisor with broker-dealers, and four as an RIA. Mark has a Masters in Philosophy from the University of Pennsylvania and is a former US Army Officer. His final active duty assignment was on the faculty of the United States Military Academy at West Point, NY where he taught Philosophy, Ethics & Critical Reasoning. Mark also writes the 401k Ethicist column for the Journal of Compensation & Benefits and some of his work can be found at Mark welcomes examples of ethical issues in the retirement plan space, and especially misleading 401k marketing materials at

To learn more about Mark Mensack, visit his sites and

The Securities and Exchange Commission regulates larger investment advisers under the Investment Advisers Act of 1940 (the “Act”). In a previous posting, we noted that perhaps the most significant provision of the Act is Section 206, which prohibits advisers from defrauding their clients and which has been interpreted by the Supreme Court as imposing on advisers a fiduciary duty to their clients. See Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 17 (1979) (“[T]he Act’s legislative history leaves no doubt that Congress intended to impose enforceable fiduciary obligations.”).

A number of obligations to clients flow from the fiduciary duty imposed by the Act, including the duty to act in the clients’ best interests, to fully disclose any material conflicts the adviser has with its clients, to seek best execution for client transactions, to provide only suitable investment advice, and to have a reasonable basis for client recommendations. SeeRegistration Under the Advisers Act of Certain Hedge Fund Advisers, SEC Release No. IA-2333Status of Investment Advisory Programs under the Investment Company Act of 1940, SEC Release No. IA-1623.

From these fiduciary obligations arises the duty to properly explain investments or an investment strategy to clients. Where a financial adviser provides advice about investments, “a fiduciary duty is breached when the client is encouraged to purchase an investment with a level of risk that is not appropriate for the client, or is not properly informed of the speculative nature of an investment.” Sakai v. Merrill Lynch Life Ins. Co., C-06-2581 MMC, 2008 WL 4193058 (N.D. Cal. Sept. 10, 2008) (citing Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 803 F.2d 454, 460-61 (9th Cir.1986) (holding that broker had fiduciary duty to fully inform client of nature and risks of selling short, “in terms capable of being understood by someone of [client’s] education and experience.”)).

“A fiduciary must provide a proper disclosure and explanation of the investment activity, and should warn a client to exercise caution if an investment presents a greater risk than tolerable, given the client’s goals and circumstances.” Id.see also Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1049-50 (11th Cir. 1987) (finding that where adviser assisted clients in establishing speculative option trading account, “[a] more studied opinion of the risks of option trading in light of the [clients’] then-existing investment objective was owed by [the adviser] to [his clients]. This he failed to do, in breach of his fiduciary duty.”); In re Old Naples Sec., Inc., 343 B.R. 310, 324 (Bankr. M.D. Fla. 2006) (stating that “failing to disclose and fully explain the risk of an investment to an investor can be a breach of the broker’s fiduciary duty.”); Rupert v. Clayton Brokerage Co. of St. Louis, Inc., 737 P.2d 1106, 1109 (Colo. 1987) (“A broker who becomes a fiduciary of his client must act with utmost good faith, reasonable care, and loyalty concerning the customer’s account, and owes a duty . . . to keep the customer informed as to each completed transaction, and to explain forthrightly the practical impact and potential risks of the course of dealing in which the broker is engaged.”).

A good example of the application of the fiduciary duty to explain comes from Faron v. Waddell & Reed, Inc., 930 S.W.2d 508 (Mo. App. E.D. 1996).  Although this case involves a broker-dealer as opposed to an investment adviser, Missouri imposes an unambiguous fiduciary standard on broker-dealers.  In Faron, the client approached a registered representative of the broker-dealer inquiring whether he could obtain money from a trust to purchase a new home. He asked whether it would “cost any money.” Id. at 510. After he consulted with the registered representative he felt assured he could get the money and the transaction would result in no cost to him. He did not specifically consider tax ramifications nor did he directly ask about tax consequences. He assumed Waddell & Reed was lending the money to him to use, at no cost. However, instead of a loan the transaction actually consisted of a redemption of mutual funds. Id. He obtained the $250,000 from Waddell & Reed, returning the same amount within the required 21 days. The client’s accountant discovered the tax liability in the amount of approximately $32,000 while preparing an income tax return. The accountant brought it to the attention of the client, who brought suit against Waddell & Reed.

The trial court granted summary judgment for Waddell & Reed, finding that Waddell & Reed had no duty to provide tax information because none was requested.  On appeal, the court noted:

In Missouri, stockbrokers owe customers a fiduciary duty. This fiduciary duty includes at least these obligations: to manage the account as dictated by the customer’s needs and objectives, to inform of risks in particular investments, to refrain from self-dealing, to follow order instructions, to disclose any self-interest, to stay abreast of market changes, and to explain strategies. Implicit in these obligations is a duty to disclose to the customer material facts.

Id. at 511 (emphasis added).

The court of appeals found that Waddell & Reed was privy to information and had expertise not yet proven on summary judgment to be equally or reasonably available to the client. In particular, the registered representative was aware of details of the transaction which consisted of a redemption of mutual funds, while the clients understood the transaction to amount to a short-term loan. Id. Waddell & Reed had a duty to manage the account according to the client’s expressed needs and objectives, to bridge finance by use of trust assets with “no loss whatsoever,” if possible, or to inform the client of the costs. Id. The client communicated his concerns about possible costs associated with the proposed transaction to the registered representative. The client was not told how the transaction would occur but was told it would not cost any money. The court of appeals concluded that what was meant by “costs” in the discussions between the parties remained uncertain. This implicated an unresolved question of fact, making summary judgment for Waddell & Reed inappropriate. Id.

In sum, the fiduciary duty standard requires that the client be properly informed of the nature of an investment or investment strategy. What is necessary in order to meet this standard will depend on the facts and circumstances of each case. A more in depth explanation of the risks of an investment or investment strategy will be necessary where the client’s related education and experience is minimal. Similarly, a more detailed explanation of strategy will become necessary where the strategy being implemented is more speculative in nature. Whether the fiduciary duty to explain has been met will usually be a question of fact to be decided by the judge, jury, or arbitrator after hearing all of the evidence.