When it comes to fiduciary awareness, what defined-contribution-plan executives don't know can hurt them, their plans and their participants.
Recent surveys and observations by defined-contribution experts highlight troubling gaps in executives' understanding of their fiduciary duties — fundamental weaknesses that reduce operational efficiency and increase risks of ERISA lawsuits.
"They don't realize they are fiduciaries," said Nevin Adams, chief content officer for the American Retirement Association, Arlington, Va., describing several of the greatest dangers for executives. "They don't realize they have personal liability."
Another danger is the executives' belief they can dodge fiduciary responsibility by outsourcing the role to a third party. "You can limit it and mitigate it, but you cannot eliminate it," Mr. Adams said.
The biggest hurdle for executives, is understanding their fiduciary responsibilities.
AllianceBernstein, New York, asked more than 1,000 DC executives if they were fiduciaries, finding that 6% didn't know and 49% didn't consider themselves fiduciaries. That was a trick question: All respondents were fiduciaries, based on their duties, said Jennifer DeLong, a managing director and head of defined contribution.
"We were surprised by the results," said Ms. DeLong, adding the findings of the survey weren't skewed by plan size. For example, 48% of respondents from plans with $500 million or more in assets mistakenly believed they weren't fiduciaries, she said.
The survey cited four types of fiduciaries: people having primary responsibility for their DC plans; people making "all decisions" for the plan; members of the investment committee choosing or monitoring investment choices; or members of the plan's administrative committee.
Executives' fiduciary understanding is getting worse over time, according to AllianceBernstein's surveys, which are based on random samplings of executives. In 2011, for example, 61% of interviewees correctly identified themselves as fiduciaries. The percentage dropped to 58% in 2014 and 44% in 2016. All interviewees were fiduciaries at the time they were surveyed, based on their responsibilities in human resources, treasury, finance and senior leadership positions.
"We are still puzzled by it," Ms. DeLong said. "The decline doesn't seem to fit with all of the fiduciary matters in the news," most notably lawsuits.
An AllianceBernstein report on the latest survey said two-thirds of the plans offered fiduciary training programs to plan executives. However, "about half of the respondents who have access to a training program don't think it's comprehensive," said the December 2017 report, which analyzed results from the late 2016 survey.
Results from a similar survey last year by J. P. Morgan Asset Management, New York, were "alarming," said Dan Notto, a managing director and ERISA strategist. It found 43% of respondents to the January 2017 survey didn't know if they were fiduciaries or believed that they weren't fiduciaries.
As with the AllianceBernstein surveys, the J.P. Morgan Asset Management survey interviewed fiduciaries based on their duties in executive, financial or human resources positions, Mr. Notto said.
A similar JPMAM survey in 2015 reported 43% of respondents didn't know they were fiduciaries, slightly better than the 2013 survey in which 49% didn't know they were fiduciaries.
"This is really quite striking," said Mr. Notto, given the attention to lawsuits alleging "fiduciaries have fallen down on the job." One encouraging sign was the finding that people who were aware of being fiduciaries were more confident about fiduciary acts than those who weren't aware, Mr. Notto said.
For example, 78% of the former group said they were confident their plans had an "appropriate process" to document investment decisions vs. 66% of the latter group. Also, 79% in the former group were confident their plans had an "appropriate process" to monitor investment decisions vs. 62% in the latter group.
"People who know they are fiduciaries take steps to be prudent fiduciaries," said Mr. Notto, adding greater fiduciary awareness also extends to non-fiduciary acts. Among those aware they are fiduciaries, 72% said their plans automatically enrolled participants and 61% said their plans offered auto-escalation, he said. For the unaware group, the respective percentages were 54% and 35%.
One disturbing sign was the finding that 17% of respondents believed they could eliminate their fiduciary responsibilities by hiring a third party such as an adviser. "This is a misperception," Mr. Notto said. "They don't realize that the act of hiring them is a fiduciary act."
Finding a third party to act as a fiduciary was the second biggest reason sponsors expected to conduct a search for a new consultant or adviser, said a Cerulli Associates survey report published in December.
The Cerulli survey, conducted in the fourth quarter of 2017, found 35.8% of sponsors cited fiduciary help as a reason for a search, just behind the 37.4% who said poor performance by a current adviser/consultant was the reason, said Jessica Sclafani, director, retirement, for the Boston-based research firm. However, executives must be aware that hiring a third-party won't eliminate their fiduciary duties, she said.
Callan found some eye-popping "don't know" or "unsure" responses in its latest annual survey, published last month. For example, 32.7% of plan executives didn't know if they employed a 3(21) adviser or a 3(38) adviser.
"There's a significant difference" between the two, said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader. The 3(21) adviser monitors and recommends changes as a co-fiduciary, but sponsors make the decisions. The 3(38) adviser selects and monitors the funds, acting as a co-fiduciary. Executives still have a fiduciary duty to monitor advisers.
Also troubling was the finding that 5.2% of respondents hadn't reviewed and/or updated their investment policy statements in more than three years while 1.9% said they didn't know if they had. Although 36.4% reviewed and/or updated their statement between one and three years ago, Ms. Lucas said a best practice is an annual review, especially if the DC plans have been changed. The survey said 56.5% pursued this best practice.
Callan asked plan executives what will they require of record keepers this year so they can monitor advice provided to participants via written communications and call-center scripts, as well as the credentials of people giving advice and other services. The survey reported that 42.7% didn't know and 12.2% said they wouldn't have any monitoring.
Ms. Lucas said a somewhat encouraging sign was plan executives conducting formal fiduciary training in the last 12 months. Among a list of 10 fiduciary topics, training ranked third in importance behind reviewing fees and updating/reviewing the investment policy statement. Callan graded the responses on a scale of 0 to 5, with five being the most important. The weighted average scores were 4 for fee review, 2.6 for statement review and 1.9 for fiduciary training.
Robert Steyer is a reporter at InvestmentNews' sister publication Pensions & Investments.