Let us tell you about a disturbing vendor arrangement we recently heard about.
Imagine a mid-sized computer manufacturer – John Doe Computers – has a 401(k) plan for their employees. The 401(k) plan administration and recordkeeping was handled by a nationally known, generally well regarded insurance company – Anonymous Megabank Inc. (AMI). When John Doe was a small business, just beginning to grow, they signed a recordkeeping contract with AMI on terms that were very favorable to the bank. For example, the 401(k) plan includes a stable-value group annuity fund with a contractually established ten-year lock up. So, every time a single employee invests a new dollar goes into the group annuity, the contract timer resets and the entire annuity holdings become illiquid for 10 years. Now, John Doe computers has been with AMI for decades, but every time one single dollar from one participant goes into the plan, the $100,000 surrender charge resets if John Doe decided to change recordkeepers without a 10 year notice, they would suffer a $100,000 surrender charge. I’m not a lawyer and I’m not sure if this sort of contract is professionally unethical somehow, but it rails against my sense that a contract is a true meeting of the minds; the arrangement clearly benefits the recordkeeper more than the client.
Have you ever heard of Stockholm Syndrome? Stockholm Syndrome is the phenomenon in which victims in a controlling relationship begin to sympathize with their abuser; often it is used to describe the feelings of kidnapping victims or criminal hostages who, being captive and isolated in a traumatic experience, exhibit unwarranted feelings of positivity and bonding to their controller. There are 2 keys to affecting this response: high stress and isolation.
This blog focuses on investments, market commentaries, and issues of fiduciary governance. What does Stockholm Syndrome have to do with this?
The decisions facing investment committees can be truly daunting. Investment committees are responsible for millions – sometimes billions – of dollars. High stress, given this enormous weight, is a given. Faced with monumental responsibility, it is often easier to defer questions to a trusted advisor or consultant. Of course, there should be a substantial level of trust between consultants, investment managers, and other vendors, but our concern is that the trust an investment committee places to any single relationship goes beyond prudence.
How can you tell if the trust in these high-stress relationships is warranted or if it has exceeded appropriate bounds? The answer regards the second key feature of Stockholm Syndrome: isolation. Have you read our May 2013 newsletter Improper Roles for Advisors, we underlined this important clause: “Even the best run relationships, with fair costs and high service standards, should periodically conduct a Request-For-Proposal to ensure the client’s best interests are being served.” In other words, isolation in a captive environment, without comparing costs and services, is the easiest way to let trust and sympathy go beyond duty. A periodic review of costs and services of all vendors – including your consultants – will ensure that the trust is well placed.
Better still, savvy consultants to monitor the existing arrangements can suggest ways to make the existing relationships turn into positives again. In the case of John Doe Computers and AMI, John Doe has been able to unwind itself from a potentially abusive relationship with the help of legal and investment plan. (Please ask us for particulars if you want to know specifically how this was done.)
So: are you relating too much to your kidnapper? At the end of the day, investment consultants, recordkeepers, actuaries and other vendors are employees to you, our clients. Some stress is inevitable. Don’t let yourself get isolated. We encourage every institutional plan sponsor, employer, investment committee, and board to periodically check their service arrangements and the competitiveness of their costs. Ask around and get help from professionals.