Kelly is a nurse in a medium-sizedmedical group of 20 or so physiciansin the Midwest. She likesher job and never thought she would bethe instigator of a lawsuit against herown doctors. Nevertheless, when heremployer changed pension plans severalyears ago and her 401(k) went south,things changed. Her accountant/lawyerhusband prodded her into suing herown doctor group, although she was reluctant.Nevertheless, the evidence thather colleagues were working againstKelly's best interests in the employerpension plan was overwhelming.
This is why. The options that Kellywas offered included load funds withsteep expenses. This means the funds shewas required to choose had to outperformtheir index in order to keep upwith the market, a feat almost no fundmanager can sustain. Also, index fundswere not offered in the pension plan.
Who Is to Blame?
At first, Kelly thought the brokeragefirm that her employer had signed upwith was the problem. Surely, her owndoctors could not be at fault. But, herhusband disagreed.
He explained to her, "Stockbrokersowe fiduciary duties only to their broker-dealers—not to their investmentclients. Registered investment advisorsowe fiduciary duties only to their investmentclients because they don't havebroker-dealers. However, when a broker-dealer has a dual registration as botha broker-dealer and a registered investmentadvisor, according to somethingcalled the Merrill Lynch Rule, the broker-dealer is not necessarily a fiduciary.In simple terms, your doctors are responsiblefor the choices in your plan,not the broker-dealer that advises andadministers your plan." This was difficultfor Kelly to believe. She asked herhusband to confirm this. He took actionand arranged a meeting with a vice presidentof the advising broker-dealer firm.This man told them flat out, "We arenot fiduciaries for this plan."
This clarification left only one groupstanding to sue for the money Kelly hadlost in her 401(k)—the executive committeeof doctors who chose the pensionplan. Kelly's colleagues joined her in thelawsuit. The physicians soon learned thattheir own personal net worth was at riskbecause they were charged with failing tofulfill their fiduciary responsibility to the401(k) plan. These physicians could beliable for considerable damages becausethe group had over 100 employees.
Cold Hard Facts
Kelly's husband told her that thephysician group had not shown " stewardship" in directing the plan. Theirfiduciary ignorance had generated revenuesfor the advisors, their firm, andthe mutual funds recommended, buthad not benefited the employees. Theirhard-earned cash had too many handsdipped into it for their return to be anymore than mediocre or worse.
Kelly and the other employees feltbetrayed by their doctors. The physiciansfelt deceived by their pension advisors.Everyone wondered what went wrong.The doctors had a legal audit performedon their 401(k) plan. This dissectionsuggested several irregularities, butdid not touch on the real problem—thefees charged to the plan participants.
Although this story is not documentinga specific event, it is a very likely scenario.Class action lawsuits are beingfiled mainly in Illinois, but elsewhere aswell, alleging disturbing fee practicesamong 401(k) sponsors. The complaintscharge that the "prudent man" standardhas been violated by the fiduciaries' failureto control expenses in the plan.
W. Scott Simon makes the case for thisline of thinking in a recent MorningstarAdvisor.com article. Simon is an experton the Uniform Prudent Investor Act andauthor of a book on the subject. The followingis his argument:
•The funds or money managers recommendedby the advisor have superiortrack records over a short period.
•The advisors promote this activemanagement because it justifies their fees.
•An exceptional active managementtrack record cannot be sustained. Thus,the high expenses are not justified.
•Since wasting beneficiaries' moneyis imprudent, this "chasing return" putsthe fiduciaries of the plan at risk for lawsuitsby their employees.
Steps to Be Taken
The easiest time to address the aboveissue is when you are changing advisors.
Dissecting the recommendations of anadvisor can be discouraging and timeconsuming. They usually sugarcoat anysuggestions they make, and physicianssimply don't have the knowledge torefute their recommendations, whichmay be heavily weighted toward theadvisor's own self-interest. A group cantackle this by hiring a specialist to do thisfor them. Some possibilities include:
•www.whitehorseadvisors.com. Providesservices designed to enhance 401(k)performance and maximize value.
•www.littler.com. National employmentand labor law firm.
Alternatively, a physician group canhire a third party to take fiduciaryresponsibility. Some possibilities include:
•www.prudentllc.com. Invests, manages,and monitors money according to aprudent fiduciary process.
•www.erisa-fiduciary.com. Fiduciaryaudits, reviews, and moneymanagement.
Shirley M. Mueller, MD, dissects barriers toeffective monetary decisions so theybecome manageable. Her unique trainingand experience as a practicing physicianboard certified in neurology and psychiatry,combined with her 7-year investment advisorcareer, contribute to her expertise. She welcomes questionsand comments at MyMoneyMD@aol.com.
Web's Worth: For more information,visit the following sites:
•www.prudentllc.com/download/Scott5-25-05.pdf. Article by W. Scott Simon fromMorningstarAdvisor.com, May 25, 2005.
•www.401khelpcenter.com. For plansponsors, retirement professionals, andsmall business and plan participants.
•www.sec.gov/investor/pubs/sponsortips.htm. Ten questions to ask your advisor.
•http://boss.streamos.com/wmedia/edwork/fc/fc030607.wvx. View governmenthearing on pension plans.
•www.sec.gov/answers/401(k).htm.401(k) questions and complaints.