Last month, we looked at how investment fiduciaries could generally be broken down into three different categories. Now we'll begin looking at each type in more depth, starting with the investment steward.
As noted in that first post on the types of investment fiduciaries, investment stewards are the trustees, investment committee members, plan sponsors and others in similar positions who are responsible for managing the money of others. The Department of Labor defines their basic responsibilities thusly:
[T]o run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses. In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.
Investment Stewards make for an interesting case because they carry the most risk and are in charge of managing the entire investment process and yet are usually the least trained and experienced in investment decision making. Beyond the basic tenets of fiduciary responsibility described above, statutes, regulations and case law have defined more specifically what the prudent management of investment decisions entails. Liability arises in the gaps where certain duties are potentially not being performed, exposing investors to unnecessary risk or to less than diligent decision making. The best way to reduce liability for stewards is to follow processes, document decisions, delegate to professionals the roles they are not equipped to perform themselves and, above all, remember what is at stake for those who have placed them in a position of trust and act accordingly.
While investment stewards can limit their liability, they can never fully abdicate their responsibility to be the true managers of the investment process. All decisions need to be made with proper due diligence and conscientious monitoring, including the decision to delegate responsibilities to professionals and the ongoing monitoring of their effectiveness. The steward starts with and retains all fiduciary responsibilities and will be held accountable for their being performed appropriately. In our classroom programs we illustrate the point by asking students to imagine themselves in "the chair" in a courtroom defending their decisions. Could you confidently say all duties were being performed? Could you articulate your decision making processes? Do you have documentation that proves you acted prudently? Would you be able to look others in the eye and say that you made decisions because they were right for those whose money you were managing?
Despite individually sitting at the top of the fiduciary pecking order and collectively managing a majority of all assets invested in capital markets, it is not uncommon for investment stewards to be virtually unaware of the scope of their duties, if they even realize their liability exists at all. One of the most important fundamental shifts needed to improve the management of retirement assets and other investment management is for a greater awareness among stewards of both the extent of their responsibility and the specifics as to what is required for prudent management.
For more information on basic fiduciary responsibilities for investment stewards, check out the following resources:
- fi360's Self-Assessment of Fiduciary Excellence for Investment Stewards: http://safe.actifi.com
- fi360's Prudent Practices for Investment Stewards handbook: http://www.fi360.com/main/practices_sa.jsp
- DOL site on fiduciary responsibilities: http://www.dol.gov/dol/topic/retirement/fiduciaryresp.htm
- DOL site for fiduciary education: http://www.dol.gov/ebsa/fiduciaryeducation.html
- The law firm Reish & Reicher's publications for plan sponsors: http://www.reish.com/publications/content.cfm
- TIAA-CREF's guidelines for fiduciary compliance http://www.tiaa-cref.org/administrators/compliance/guidelines/categories/fiduciary.html
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