What Are Industry “Best Practices” Anyway? By: Gabriel PotterMBA, AIFA® 2014.07.21

Consider this example: imagine you’re coming home from work and you decide to deposit your car keys, wallet, and important work folder on your front porch, outside your house, in plain view. It’s a convenient place to leave your keys and wallet – you’ll step over them on your way out the door the next morning, so you definitely won’t forget them. Stealing is clearly illegal, so you can trust everyone not to take these items during the night.

It seems ridiculous, right? You’re clearly allowed to leave your stuff unprotected and counting on the goodwill of everyone in your neighborhood, but wouldn't it be better to simply move it inside? This disconnect between what you’re allowed to do and what is in your best interest is at the heart of best practices.

In a previous blog post – Mistakes Consultants Make - we discussed the practice of consultants trying to provide fiduciary consultants to both retirement plan participants and the plan sponsor (though the investment committee, named fiduciaries, and so on). By the end of the blog post, we do point out that this practice isn’t expressly forbidden in all instances. As we mentioned, there are exceptions to the rules, like “informed consent”. There are companies – lots of them – which aim to provide support to both participants and fiduciaries. There are rules about prohibited transactions that need to be followed when managing the needs of both groups.

Are they being followed perfectly in all cases? No – probably not – but how many people are enforcing the law anyway? The letter of the law does allow consultants to cater to both groups, and there’s certainly a financial advantage for these firms. However, we feel this is a violation of the spirit of the law. The spirit of the law is about protecting the best interests of plan participants. Large consulting firms can get away with providing competitive-rate engagements with plan fiduciaries because they’ll earn relationships with retirement plan participants in a non-fiduciary capacity, through rollover of retirement assets once they retire. Is it legal? It might be – assuming the participant has signed the necessary disclaimers along the way. Is it ethical? That gets more complicated.

Here’s what “best practices” means: an adherence to the letter and the spirit of the law. In this case, best practices supports an engagement, without reservations or complications, which protects the interest of the plan participant.

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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