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| > Investing > Fiduciary Focus |
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| A Conversation with a Fiduciary |
| by
Matthew D. Hutcheson
| 06-07-07 |
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Receptionist: Bob, Mr. Fiduciary is here to see you. He says he's a few minutes early.
Bob: Thank you. Please have him come to my office. (Thinking to himself: I'm relieved to finally put this matter behind me. I'm confident this guy will help me solve this problem once and for all.)
Fiduciary: Bob, thank you for asking me to visit with you. How can I help?
Bob: Well, one of my employees thinks they are not being treated fairly by our 401(k) program, and because this employee happens to be my nephew, I thought I should get the opinion of an objective third party--out of respect for my sister, of course. Smiles and winks.
Fiduciary: Smiles and lightly chuckles. I understand.
Bob: We have about 120 employees. All of them, except "the one" are very happy with our 401(k). We have one of the best 401(k) plans available anywhere, and it's free to our company.
Fiduciary: Tell me more about it.
Bob: It permits employees to join after 90 days of employment. It has 12 funds, all "5 star" ones I might add. We also make a matching contribution.
Fiduciary: Has your nephew shared a specific concern with you?
Bob: A specific concern? How about a dozen specific concerns? He graduated from college two years ago and came to work for me at that time and sometimes comes across as a know-it-all. He even went so far as to accuse me of breaching my fiduciary duty to him and saying I am guilty of fiduciary misfeasance. Kate and I decided to stop having him over for dinner for several months after that last accusation. Smiles and light laughter.
Fiduciary: Okay, let's start at the beginning. What is his first concern?
Bob: Gee, where do I start? Oh, I know. He says that I have a legal obligation to invest his 401(k) money for him. Can you believe it? That's his responsibility! I'd never make decisions affecting his or anyone else's 401(k) investments.
Fiduciary: Why not?
Bob: It's a no-win scenario. He would point the finger at me when his investment returns aren't high enough.
Fiduciary: Are you saying that you believe you would get lower returns for him by making those decisions on his behalf than he would if he invested his own account?
Bob: Um, I don't.
Fiduciary: Would you let your nephew make the investment decisions in your 401(k)?
Bob: Of course not! What kind of question is that?
Fiduciary: You expressed a concern that you think he would point his finger at you for getting investment returns that were lower than he himself could have gotten on his own. If that argument is true, then why wouldn't you want him to invest your account?
Bob: Huh? That's not what I meant. Is that a trick question?
Fiduciary: No, it's not a trick question. Let's think about this together for a minute. First, do you really believe he could get higher returns making all investment decisions for himself than you could investing on his behalf, all things being equal?
Bob: Um.
Fiduciary: In other words, each of you has access to the same 12 funds. You each have a time horizon of more than 15 years to invest. Isn't it true that theoretically you could have identical returns over that 15-year period if you were investing funds on the exact same day in the exact same funds?
Bob: I'm not sure.
Fiduciary: Let me make this a bit easier. Do your 12 mutual funds automatically produce better results for you as CEO than they do for, say the new hire in the mail room?
Bob: No, certainly not. I don't see your point.
Fiduciary: Do you expect lower returns than your nephew?
Bob: Of course not. I know we've just met, but I'm starting to wonder if we should table this discussion for now. It's not going where I thought it would.
Fiduciary: Bear with me a little longer, will you?
Bob: I guess, but get to your point.
Fiduciary: All right. Is it safe to say that those 12 funds, when properly utilized in aggregate and in the correct ratios, could produce identical returns for both of you?
Bob: Sure, that seems obvious.
Fiduciary: So, what is good enough for the CEO, is also good enough for the CEO's nephew?
Bob: Sighs. Of course.
Fiduciary: Since your nephew has been participating in your plan, have you earned identical returns?
Bob: How am I supposed to know? His 401(k) is his business. That is his responsibility, not mine.
Fiduciary: We'll come back to the responsibility issue later. For now, let's explore why your nephew might be concerned. What do you do as the Plans' fiduciary to ensure all participants get the highest return possible, given identified constraints such as the appropriate levels of risk, time frames, income replacement objectives, etc?
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