Emphasize Quality Over Quantity
Retirement plan fiduciaries are hiring independent fiduciaries with greater frequency. Structured properly, the plan fiduciaries and senior management, should be insulated from liability for the actions of the Independent Fiduciary, provided that the process of selecting and hiring the Independent Fiduciary is prudent.
The process need not be tedious or cumbersome. Furthermore, it should not be delegated to junior professionals with a mere rubber stamp approval provided by senior management. A robust process, conducted with integrity, serves as an important foundation for fiduciary decision-making.
1. Meet and interview the Independent Fiduciary candidate.
There is nothing more important than meeting with the potential Independent Fiduciary. Most advisors, I suspect, would say that compiling data through an RFP process is the most important part of the process. I disagree.
Data is important, but it does not take the place of a face to face meeting. Serving in a fiduciary capacity is a position of trust. While technical skills can be assessed through an RFP response, trust can not. Trust should be determine through a face to face meeting in which the hiring fiduciary attempts to gauge the way in which the Independent Fiduciary will analyze problems and execute fiduciary decisions.
2. Assess the Fiduciary’s Independence.
The best laid plans of fiduciary protection will fail if the fiduciary is not independent.
The industry serving the retirement plans is vast and interconnected, a veritable spider web of relationships. Hiring fiduciaries must be assured that the Independent Fiduciary does not have any relationships with the plans that could give rise to a prohibited transaction. Focus on the receipt and payment of fees among the plans sponsor, the plan, the Independent Fiduciary and any affiliates of the above.
3. Review the Independent Fiduciary’s Procedures.
Every fiduciary should have a set of written procedures that it follows for a fiduciary engagement. Request a copy of these procedures and evaluate them. Ask the candidate whether they certify that the Procedures were followed. Be assured that the procedures are specifically tailored to the particular engagement and that they are not simply boiler-plate lists of tasks.
4. Inquire about Fiduciary Litigation.
Explore the candidate’s litigation experience. The plaintiff’s bar is very active. Qualified fiduciary candidates may have both been sued for breach of fiduciary duty and have won the case based on the facts; that is, a finding of the court that the fiduciary acted prudently. Specifically, question whether the fiduciary’s procedures withstood the scrutiny of litigation.
5. Is the Fiduciary an Expert?
Fiduciaries must be prudent experts. Under take the requisite due diligence to determine that the fiduciary is both an expert with respect to the specific engagement and with respect to ERISA principles. Investment/financial skills as well as fiduciary expertise are critical. Compilation of data through an RFP can be helpful in this process.