Of Fiduciaries and Liability

I have spoken before of the Department of Labor’s regulatory initiatives to target fee setting and disclosure issues, and how they are likely to expand fiduciary liability related to the expenses of 401(k) investment options. Of a piece is the Department of Labor’s yet more recent regulatory initiative to expand the scope of advisors who can qualify as fiduciaries, which, if and when enacted, will by definition expand the number of fiduciaries and the potential number of parties liable for problems in a plan or its investments. Although it comes from Canada by way of New York, I am partial to this blog post on this regulatory change, which covers it quite succinctly.  For a further discussion of the proposed regulatory change, you can see here as well.

I mention this now because, in my view, we have already entered a world of expanding fiduciary liability, and this regulatory change will speed that change. With the change from a pension based system (which had relatively little risk for the individual participant) to a defined contribution plan system (in which all investment risk is borne by the participant), it was only a matter of time before the narrower application of fiduciary liability, ensconced during that earlier era and likely appropriate to it, shifted to accommodate this new reality. We are seeing that occur now, even if often just glacially.

For fiduciaries of defined contribution plans, this means an expansion of their own personal risk, one that in turn demands higher diligence by them in managing plans, selecting investments, and other potentially risky activities. Nevin Adams had a cute post early this week about what fiduciaries of 401(k) plans should know in a nutshell, which you can read here: its particularly apt advice in light of the expanding nature of their potential liability.