To Manage Fiduciary Risk – Hire an Expert Fiduciary

By: Mitch Shames

When your pipes back up, you call a plumber. When you are experiencing stomach distress you call a doctor. When you are planning for retirement you call an investment professional. When you want to manage fiduciary risk, who you gonna call? A fiduciary expert!

Polling data consistently suggests that 82% of plan participants desire lifetime income options to be included in their 401(k) savings plans. But, the data also reflects that concerns related to fiduciary risks are one of the most significant obstacles preventing wider implementation of lifetime income solutions by plan sponsors.  

The term fiduciary is widely misunderstood. It sounds old fashioned, but nonetheless important. When I’m asked about my firm and I reply that we provide fiduciary services for retirement plans, more often than not, people’s eyes glaze over, instantly. Try that at a cocktail party. It’s not a great conversation starter.

Admittedly, it is a legal term, and it has a very specific meaning – at least for lawyers and people in the business. Still, in my experience, non-experts use the term in a loose fashion. So too, the term fiduciary risk. My hunch is that the term is used to cover a wide variety of concerns and uncertainties that can’t necessarily be articulated or quantified.

When it comes to lifetime income solutions, I suspect that fiduciary risk can be a cover for a deep discomfort and lack of experience surrounding annuity investments. Understandably, annuity products have NOT traditionally been part of the expertise developed by plan sponsors over the past decades. I too would be very uncomfortable.

For us, however, fiduciary risk has a very precise meaning. It is the risk that Department of Labor or a court would determine that an investment authorized by a plan fiduciary was NOT considered prudent. A fiduciary can be held liable for imprudent investment decisions.

As with any attempt at managing risk, the first step is to identify the nature of the risk, the next step is to establish the tools which mitigate the risk, and lastly to implement the tools along with a process for monitoring the success of the risk management. Importantly, the monitoring of risk also includes a constant process of evaluating and updating the understanding and assessment of the risk metrics. For us, that means staying on top of product innovations, insurance risk events, regulatory pronouncements and, of course, litigation developments. Any changes in these arenas could likely necessitate a revision of our risk parameters. Risk mitigation is not a static process.

Taking this knowledge and experience into account, we have developed a propriety model which can substantially mitigate fiduciary risk. Just as out the outset, I noted that it is customary to hire experts to handle to various challenges (plumbing, medical and investment) our combined 60 years of legal and investment experience provide the foundation for our fiduciary expertise. Risk mitigation processes are core to our business model, and frankly, are baked into our professional DNA.

In many types of endeavors, it is rare that risk can be eliminated. Instead, we all take actions to manage and minimize risk.

Simply put, fiduciary risk can be managed successfully by fiduciary experts.

If you are interested please reach out to us. We love to brainstorm around these issues and we’d be happy to talk more about our proprietary risk mitigation methodology.