Repair Your Wealth
Advice for 401(k) Investors and Investment Committees
Lon E. Henderson
January 23, 2012
Many investors and 401(k) plan participants are still reeling from the unprecedented volatility experienced in 2008 and 2009. When the S&P was off -37 percent for 2008, followed by an additional -18 percent during the first two months in 2009, many investors were not only shell-shocked, but realized that they were witnessing over half of their retirement assets erode in less than six months. Such carnage in the financial markets caused some investors to literally refuse to open their brokerage and 401(k) statements. Such reactions were common until the domestic and foreign equity markets started to recover, posting a positive 26 percent return at the end of 2009 and leaving most investors with the feeling of just stepping off an emotional roller coaster.
Although investors are tempted to ignore negative news and attempt to disregard the affect of volatile markets on their investments, such behavior is not appropriate for fiduciaries and investment committee members who are entrusted with one of the hundreds of thousands of 401(k) plans that are being managed throughout the nation. Such plans must be managed by the fiduciaries for the sole benefit of the plan participant.
One of the reasons that investment committee members and the fiduciaries of 401(k) plans must take an active role in managing the plan is due to their mandated responsibility to meet specific fiduciary obligations as relegated under the demands of ERISA (Employee Retirement Income Security Act).
In compliance with ERISA, the fundamental duties of the fiduciary are clearly stated. The act is written and structured so fiduciaries will ensure that their efforts are in the sole interests of the plan participants and for the exclusive purpose of providing the participants with prudently managed retirement benefits. The standard of the plan fiduciary is very high and, as one court stated in Donovan v. Bierwirth, “the fiduciary obligations of the trustees [and other ERISA fiduciaries] to the participants and beneficiaries of the plan are … the highest known to the law.
The Prudent Man Rule
Having the confidence that the fiduciaries are operating in your best interest, besides exercising the skill and discretion necessary, is a standard known in the industry as the “prudent man rule.” The ERISA law clearly states that each fiduciary must use “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.”
When fiduciaries further understand this standard, they quickly realize that their behavior will be judged and compared to other prudent committee members and fiduciaries throughout the world who are laboring to accomplish the same goals for their retirement plan participants; a goal that is hopefully directed and focused on building wealth for the plan participant.
With today’s economic challenges, financial expertise and resources may be limited and difficult to obtain, especially for an employee benefit plan. But what is being discovered by many corporate executives is that the skills and insights of a competent and experienced independent professional advisor not only provide opportunities for enhancing returns, but also offer assistance in better managing expenses. In addition, the executives seeking assistance align themselves with best practices and compliance procedures that often provide risk mitigation strategies for fiduciaries and investment committee members whose role requires the acceptance of personal liability.
“We find that when investment committee members implement a well documented process for managing their fiduciary responsibilities, superior results are most often achieved, not only for the plan participants, but also in accordance with the overall governance of the plan,” says Kim Anderson, vice president of retirement plan services for Soltis Investment Advisors.
While ERISA fiduciaries are held to the standard of a hypothetical knowledgeable investor, the law “does not impose a rule that fiduciaries be ‘experts’ on all types of investments they make.” The U.S. Department of Labor (DOL) and a number of courts take the position dictating that if fiduciaries are not qualified to fulfill their duties, they are required to seek help. The DOL has stated, “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert.” It is clear that the recommendation is to use an independent expert or advisor, rather than one who is potentially conflicted because of the investment products that he or she is compensated to sell.
Where’s the Guarantee?
In investing, nothing is guaranteed, but there is one thing that appears to be certain: In today’s financial markets volatility appears to be here to stay and markets will remain difficult to navigate for the 401 (k) plan participants, fiduciaries and investment committee members. If you are like most investors and feel confused, inquire and assure that your company’s investment committee is utilizing a qualified independent expert that has the skill and experience to help you grow and maximize your 401(k) earnings.
Lon E. Henderson is the CEO and President Soltis Investment Advisors. He can be reached at firstname.lastname@example.org