“Well done is better than well said,” was Benjamin Franklin's wisdom on accountability.
It is a message that fiduciaries should take to heart. Saying one thing and doing another, or failing to deliver on an advertised service, can be a source of liability for the unwary fiduciary.
Take the recent case of a 401(k) plan sponsor that was found to have breached its fiduciary responsibility by having failed to follow a plan participant's instructions for how investments were to be allocated in her account (Womack v. Orchids Paper Products Co. 401(k) Savings Plan).
In the case, the plan sponsor offered participants the option of notifying either the sponsor or the investment platform service provider, regarding investment selections. This participant took the less common route of providing the investment instructions to the sponsor and included it among other documents such as benefit distribution instructions.
Unfortunately, the administrative person processing the paperwork for the plan sponsor failed to see or recognize the investment direction paperwork and didn't forward it to the service provider for implementation.
The timing couldn't have been worse for this oversight. The plan sponsor was in the midst of changing from one service provider to another, and all existing participants, including the plaintiff, had to change their investments and submit considerable paperwork.
The participant, who was 70, had directed that her entire balance be invested in a stable-value fund at the new service provider. However, because her instructions weren't received by the new provider, her account balance was defaulted to a diversified qualified default investment alternative.
To make matters worse, this was just prior to the market meltdown of 2008. The participant saw the account lose $100,000 that would have been preserved if her instructions had been followed.
The plan sponsor didn't have to offer to receive investment selection paperwork directly but, having done so, retained fiduciary responsibility to execute those instructions faithfully. Had it required that the investment instructions be provided solely to the service provider, the order most likely would have been executed, the balance kept intact and litigation avoided altogether.
The case points to the need for all investment stewards — plan sponsors, trustees, investment committee members, etc. — and investment advisers to review their operating policies and procedures to assure that they are sound, applied consistently and aligned to the documents governing the management of investments under their care.
Especially important is consistency in the services agreement between the steward and the steward's adviser, and the investment policy statement.
As the name implies, the services agreement lays out the services that the adviser intends to provide and the terms on which they will be provided. For retirement plans, the Labor Department's new 408(b)(2) rule, to take effect early next year, will require specific disclosures that most financial advisers are likely to address in the services agreement.
Even though that rule pertains to retirement plans, advisers should, as a best practice, review and revise all of their service agreements to be consistent with the service, cost, affiliation and fiduciary-status disclosures of that rule. Advisers should be careful to list the specific services that will be provided in all instances.
As the Womack case illustrates, it is also a good idea to identify services that won't be provided. The adviser may be concerned about avoiding responsibility and liability for activities that could be deemed as areas of shared or unclear responsibility, and areas that the adviser deem to be high-risk because of the specific circumstances of a particular client relationship.
There is a pervasive fear in the compliance community that saying too much in the investment policy statement adds litigation risk. However, length and specificity are not, in and of themselves, sources of risk.
As the business plan for managing the portfolio, the investment policy statement is most valuable if it is thorough and descriptive of how the portfolio is to be administered, and the investment strategies, tactics and procedures to be applied. If the
portfolio management techniques to be applied change according to economic and market circumstances, the language of the investment policy statement must provide for this flexibility.
In short, best done is that which has been well said.
Blaine F. Aikin is chief executive of Fidicuary360 LLC.
