The term “fiduciary” gets used a lot these days; sometimes, we suspect, without a true understanding of what the term means and how fiduciary responsibility applies to our industry. It’s a corner of the financial industry that can be a little murky.
Being a fiduciary comes with a certain level of responsibility. An investment fiduciary is any person who has the legal responsibility for managing somebody else's money. What this really means is that you have been placed in a position of trust and there may be consequences for betrayal of that trust.
The primary duty of all ERISA fiduciaries is to act in the sole interest of the plan and its participants and beneficiaries. You must:
- Act with the care, skill, prudence and diligence of a prudent person who is familiar with retirement plan matters
- Follow the plan documents
- Pay only reasonable plan expenses
- Diversify plan investments
- Avoid conflicts of interest and self-dealing in directing plan transactions.
Expertise in a variety of areas is required of fiduciaries. Fortunately, you can act to limit potential exposure by relying on competent outside advisors to assist with complicated matters. Your obligations do not end with the selection of a service provider because ERISA imposes an ongoing duty to monitor with reasonable diligence the providers in order to ensure that they are meeting the plan's expectations.
Through proper execution of the prudent investment process, trustees and investment committee members can reduce their liability by being confident that they are fulfilling their fiduciary responsibilities. Fiduciaries should embrace their responsibilities and understand that they will not be judged on the returns of their portfolio, but on the prudence employed in the creation of the returns. If fiduciaries get the process right, they should be able to achieve admirable returns for their organizations. In the end, it's not whether you win or lose, it's how you play the game.