Fiduciary discretion: a Plan For imProving outcomes

Spooked by the Specter of Fiduciary Liability?The mere whisper of the word “fiduciary” is enough to send shivers down the spines of many retirement plan sponsors — and not without good reason. By definition, plan sponsors are plan fiduciaries. And recently, the employee benefits arena has been filled with court cases in which sponsors have faced harsh consequences for not understanding and fulfilling their fiduciary responsibilities to their plans.

Understanding Your Fiduciary ResponsibilitiesPension law (ERISA) assigns plan fiduciaries specific responsibilities with regard to plan investments and administration. In addition to exposing you to fiduciary liability, how you execute these duties can have a significant impact on how well your plan participants achieve their retirement goals.

Topping the duties are loyalty and prudence, fol-lowed by the more mechanical duties of diversification and adherence to the plan documents. In the case of loy-alty, ERISA directs fiduciaries to discharge their duties with respect to a plan solely in the interest of the plan participants and beneficiaries for the exclusive purpose

of (1) providing benefits to participants and their ben-eficiaries and (2) defraying reasonable expenses of ad-ministering the plan.

Fiduciaries who breach their responsibilities are personally liable for restoring the plan to the condition it was in prior to the breach, including restoring any monetary losses and returning any profits made through the use of plan assets. A fiduciary also may be subject to monetary penalties for violating certain ERISA and IRC prohibited transaction rules.

The Delegation MisconceptionFortunately, ERISA allows plan sponsors and other plan fiduciaries to delegate certain fiduciary responsibilities. In fact, ERISA encourages sponsors to seek professional help. As a result, most sponsors hire an institutional trustee for their plans — after which many breathe a sigh of relief believing that they have also delegated their fiduciary responsibility, as it relates to plan assets, to the designated trustee.

Most often, this isn’t true. There are two types of institutional trustees, directed trustees and discretionary trustees. Very few financial institutions serve as discre-tionary trustees. A directed trustee holds the plan assets in safekeeping and acts as directed by the plan sponsor. Typically, a directed trustee does not advise the other

BY DR. GReGoRY KaSTen

plan fiduciaries regarding the plan’s as-sets. Nor does a directed trustee gener-ally have the discretion to make invest-ment decisions. Directed trustees often refuse fiduciary responsibility, leaving the sponsor on its own.

These limitations have led the U.S. Department of Labor (DOL) to take the position that a named fiduciary, such as a plan sponsor, may not be relieved of any of its potential fiduciary liability under ERISA simply by appointing a directed trustee.

enter the Discretionary TrusteeA discretionary trustee provides plan sponsors and their participants with a high level of fiduciary protection. Unlike a directed trustee, a discretionary trustee has exclusive authority and discretion over the management and control of plan assets. A discretionary trustee assumes responsibility and liability for selecting, monitoring, and, if necessary, replacing plan investments.

Consequently, the DOL holds a dis-cretionary trustee to a much higher stan-dard. A discretionary trustee must ob-serve ERISA’s prudent-expert rules and maintain well-documented records of all decisions and actions made on behalf of the plan and its participants. In contrast to directed trustees that can make con-flicted decisions about plan investments based on the revenue they receive from a fund company, a discretionary trustee is required to make unconflicted decisions. A discretionary trustee’s decisions must be made without regard to the amount of revenue it may receive from a fund com-pany for an investment selection. In fact, per DOL guidance, a discretionary trust-ee is not allowed to keep revenue sharing payments. Rather, the trustee must pass payments back to the plan as a fee offset.

By choosing a discretionary trustee, you can limit your fiduciary responsibili-ty for plan assets to the prudent selection of the discretionary trustee and periodic monitoring of the trustee’s services.

Improving Retirement Plan outcomesMinimizing fiduciary risk isn’t the only reason to choose a discretionary trust-ee. Because a discretionary trustee can exercise discretionary authority over

the investment of plan assets, it has the unique capability to improve overall plan outcomes by improving individual participants’ retirement success rates. Unified Trust, for example, has focused on the required fiduciary duty of loyalty to develop the UnifiedPlan® to improve plan outcomes.

The retirement goal for most plan participants is to be able to retire suc-cessfully. National statistics show that upwards of 80% of plan participants are not on target to have sufficient re-tirement savings to replace 70% of their preretirement income — an often-cited benchmark. Each year, plan sponsors spend substantial amounts on communi-cation materials, websites, and other ed-ucational efforts to improve their plans’ success rates.

Unified Trust’s proprietary Unified-Plan increases success rates by com-bining intelligent defaults — a defined goal for every participant, automatic enrollment, savings increases, an actuar-ial solution tailored to each participant, prudent portfolio selection, and portfo-lio rebalancing. All of this is done with fiduciary oversight and in conjunction with education services provided by in-dependent plan advisors. Essentially, the UnifiedPlan provides participants with a managed account solution that offers them greater retirement income securi-ty at a cost competitive to, and typically less than, other managed account offer-ings. Cost per successful employee may be greatly reduced.

enhanced Results Through DefaultTo be successful, a retirement program must address several common partici-pant behaviors: inertia, procrastination, and the “endorsement” effect. Default programs are the most effective way to overcome these harmful behaviors.

Many participants would rather not be actively involved in managing their retirement accounts. Sponsors can cap-

italize on this preference, as the Unified-Plan does, by using a “default” pathway where the participant must opt out to bypass the program. The UnifiedPlan model eliminates another significant barrier by not charging participants any additional fees. Most other managed ac-count platforms require participants to pay a management fee. The UnifiedPlan presents the “answer,” rather than ques-tions that require participant action. The result: Retirement plans adopting the UnifiedPlan have experienced a dramat-ic improvement in the percentage of par-ticipants on track to retire successfully. — from 24.4% of participants to 72.5% of participants, according to 2012 data. On average nationwide, only about 20%-25% of plan participants are on target for retirement success.

Are you shadowed by the specter of fiduciary liability and less than optimal retirement plan outcomes? If so, you may want to explore the services and benefits of using a discretionary trustee.

about the authorDr. Gregory W. Kasten, MD, MBA, CFP®, CPC, AIFA®, serves as Founder and CEO of Unified Trust Company, a nationally chartered trust company based in Lexington, KY. He has published more than 75 papers on financial planning and investment-related topics and written two editions of the book Retirement Success.

Gregory W. KastenChief Executive OfficerUnified Trust Company2353 Alexandria Dr. Suite 100Lexington, KY 40504greg.kasten@unifiedtrust.comPhone: (859) 296-4407 x 202

a discretionary trustee provides plan sponsors & their participants with a high level of fiduciary protection. Unlike a directed trustee, a discretionary trustee

has exclusive authority & discretion over the management & control of plan assets.