Posts Tagged ‘fiduciary’

The finance reform has created many questions regarding financial advisors.  This article discusses the differences between a fiduciary advisor and a suitability broker. 

 A registered investment advisor (RIA) works under the Investment Advisor Act of 1940.  A broker-dealer works under the Securities Act of 1933. 

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Recently Wal-Mart has been in the news.  No not because of the holiday sales or how sales were on Black Friday.  Wal-Mart employee Jeremy Braden has taken his company to court over excess fees associated with their 401(k) retirement plan.  A lower court ruling was recently overturned on appeal.  The appellate panel, citing a 6^th Circuit opinion that said information is material if there is a substantial likelihood that nondisclosure “would mislead a reasonable employee in the process of making an adequately informed decision regarding benefits to which she might be entitled.”  The information referred to is the disclosure of revenue sharing arrangements and other information related to the 401(k) under the Employee Retirement Income Security Act (ERISA). 

In Braden’s complaint, he estimated that fees cost the plan $60 million over the past six years and will continue costing approximately $20 million per year in excess fees.  Braden complaint says seven of the plan’s ten funds charge 12b-1 fees from which participants derive no benefit. 

We couldn’t agree more.  Not surprisingly Bank of America Merrill Lynch is the trustee for the plan.

The complaint also alleges that despite the very large pool of assets, the ten funds available offers only retail class shares, which charge significantly higher fees than institutional shares for the same return on investments. 

Again, we agree with Braden. 

Another point Brandon made was that no changes to the plan investments were made despite the fact that most of them underperformed the market indexes they were designed to track. 

At this point, Braden should be protected under Whistle Blower laws.  Wal-Mart has a history of terminating troubling employees. 

It appears to us that both Wal-Mart and Merrill Lynch do not understand their fiduciary duties.  There is no reason why a plan of this size in not in institutional shares.  We would also question the need for 12b-1 fees.  The amount of estimated fees collected by Merrill Lynch is astonishing.  In previous reports, Wal-Mart required Merrill Lynch not to disclose its fees.  Unfortunately, at this point, ERISA and the Department of Labor still do not require full disclosure. 

Lastly, a simple review of the investment selection on a regular basis would suggest a change in investment line-up.  Apparently, neither Wal-Mart nor Merrill Lynch thought this was necessary.  Mr. Braden has really hit the ball out of the park.  He has nailed this 401(k) retirement plan as being a revenue generator for Merrill Lynch.  Like most bundled plans, the employees are captive to the plan and to poor fiduciaries decisions. 

When we work review 401(k) retirement plans, the fiduciary responsibility comes first.  Apparently, Wal-Mart and Merrill Lynch do not see it that way. 

It is important to recognize with businesses of any size and retirement plans of any size that the plan sponsor act as a fiduciary at all times when making decisions on their retirement plan.  Regular review of the plans investment selection, fees, performance and service are vital to the responsibility held by the fiduciary.

Dennis K. O’Brien was selected as a speaker at the Trenton Small Business Week event for the Retirement Plan Session.  The seminar will discuss 401(k) fee, service and fiduciary responsibility.  The event draws on business leaders from several New Jersey counties to improve their businesses.