The DOL’s fiduciary standards have not changed the rules. They’ve sharpened the teeth of enforcement by removing the cloak of invisibility called the “suitability standard,” and by wetting the appetites of class-action attorneys. It’s the fiduciary version of the movie “Now You See Me”, a film about magic with a Robin Hood undertone. More importantly, beneficiaries and their attorneys have a clearer vision of what a fiduciary is and their obligations. Consequently, the plaintiffs’ bar is poised for the next big scandal, one in which I believe will involve target date funds.
The Duty of Care
Fiduciaries, namely plan sponsors and their advisors, routinely violate the “Duty of Care” in their selection of TDFs. It’s a mistake that will prove catastrophic to beneficiaries in the not-too-distant future, leading to successful lawsuits. It’s unfortunate that lawsuits are needed to remedy this breach, but that’s how it works. For example, successful lawsuits caused lower 401(k) fees—no one cared before the lawyers won.
The “Duty of Care” is the heart of the DOL’s “Best Interest Standard.” Fiduciaries have the obligation to try to do their best on behalf of their beneficiaries, something akin to protecting minors—a moral imperative as well as the law.
Fiduciaries aren’t required to actually choose the best option for their client, however it’s defined, but they have to try. Good faith, or so-called “empty head and good heart,” isn’t enough. In the case of TDFs, fiduciaries can’t simply chose a Qualified Default Investment Alternative (QDIA), as some believe. Investing in safe harbors does not relieve a fiduciary of the duty of care.
Unsafe Harbors
Fiduciaries generally believe that they are protected from litigation by two safe harbors in their selection of target date funds:
- Properly structured TDFs are QDIAs under the Pension Protection Act of 2006. Form over substance.
- There is safety in numbers, so choosing one of the most popular TDF providers is prudent. Fidelity, T. Rowe Price and Vanguard manage 65 percent of the blossoming TDF market. You can’t go wrong with a brand name. Or can you?
There’s more to selecting TDFs than these two simple rules. Specifically, not vetting your TDF selection is a breach of fiduciary duty that will bring lawsuits (loss-suits) when we experience the next 2008-style financial crisis. Most TDFs, including the Big Three, are ticking time bombs because they still include too much risk at the target date.
Fiduciaries are exposed to lawsuits because they are obligated to actually vet their TDF selections and to establish objectives that are truly in the best interests of participants. Fiduciaries are duty bound to seek solutions rather than settling for high-risk products that are oblivious to history. Ignoring the past (especially 2008) and hoping it’s different the next time is not an option, and it’s certainly not an enlightened view of risk management.
Ronald J. Surz is president of PPCA Inc. and Target Date Solutions in San Clemente, California.Target Date Solutions developed the patented the Safe Landing Glide Path®, the basis for the SMART Funds® Target Date Index collective investment funds on Hand Benefit & Trust, Houston, the only investable target date fund index. Ron is co-author of the Fiduciary Handbook for Understanding and Selecting Target Date Funds.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
