Being Smart Won't Protect You If You Don't Think By: Gabriel PotterMBA, AIFA® 2016.08.16

In previous blog posts, including last week’s post about passive investments, we’ve talked about the number of financial service industry companies that are being sued by their own employees for failing to meet their fiduciary obligations.  Put briefly, financial service companies end up putting their own investment products into their retirement plan lineups despite the fact that they are frequently noncompetitive with peers and, therefore, not in the best interest for their employees.  You would think that industry professionals would know better.

Is this just a problem unique to financial services because of their inherent conflict of interest?  No.  There are plenty of lawsuits affecting businesses across the spectrum.  Plenty of investment committees and retirement plan committees simply don’t know that they have a legal obligation to constantly monitor the investments in their lineup for competitiveness; they get complacent, some employees get angry, and then there are lawsuits.  It happens all the time. 

On a related note, you might think that the stewards and havens of the nation’s best and brightest would be immune to these sort of dumb oversights.  Again, you’d be disappointed.   Just last week, several well-known and influential universities – M.I.T, N.Y.U., and Yale – were sued for excessive fees within their retirement plans.  The class-action lawsuits filed on August 9th allege these universities failed to replace expensive funds which materially similar, less expensive funds.  As a side note, we’ve been trying to stay on top of this sort of oversight being more prevalent in the not-for-profit world of healthcare and higher education, as evidenced by our June 2016 article, “Sorting legacy retirement plans.”

Without any specific knowledge of the individuals involved or the merits of the case whatsoever, I would still venture an educated guess that the people serving on these university investment committees are probably intelligent and highly accomplished within their fields.  Moreover, avoiding these lawsuits doesn’t require huge amounts of intelligence.  In reality, there’s nothing magical or uniquely difficult about preventing these sorts of legal problems.  Vigilance and understanding is all that’s required.  But sometimes committees don’t know what they don’t know.  Being smart isn’t enough.  You got to know what to look for.


Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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