Owners of small companies want their corporate retirement plans to serve their employees well and are legally required to do so. Unfortunately, it is commonly recognized that many owners of companies with less than $50 million in retirement assets don’t really get what it means to be a fiduciary. Employers need to understand what they’re up against—and the solution for these challenges. To help them, this report discusses the following: - Definition of a retirement plan fiduciary and employer\' duties as fiduciaries - Risks of not acting as a fiduciary - Owner\'s ability to delegate some fiduciary responsibility, thus strengthening risk management

1. Rational. Objective. Independent.
White Paper
Hiring a Fiduciary Can Reduce Company Owners’ Headaches
and Improve Employees’ Retirement Prospects
By Allan Henriques, AIFA®, J.D.
Smart Investor — A Registered Investment Adviser 9 Visit us online at www.smart-investor.cc

3. Hiring a Fiduciary
December 2009
Hiring a Fiduciary Can Reduce Company Owners’ Headaches
and Improve Employees’ Retirement Prospects
By Allan Henriques, AIFA®, J.D.
Smart Investor
5800 Stanford Ranch Road, Building 800
Rocklin, CA 95765
(916) 435-2100
www.smart-investor.cc

4. Hiring a Fiduciary Can Reduce Company administration of the plan, all members of a plan’s
Owners’ Headaches and Improve administrative committee (if it has such a committee),
and those who select committee officials… The key
Employees’ Retirement Prospects
to determining whether an individual or entity is a
O wners of small companies want their corporate fiduciary is whether they are exercising discretion
retirement plans to serve their employees well. or control over the plan,” according to the U.S.
Indeed, once employers adopt corporate retirement Department of Labor (DOL).1 The DOL administers
plans, they are legally required to do so. Putting the Employee Retirement Income Security Act of
employees’ interests first is part of their fiduciary duty 1974 (ERISA), the most important law governing
under U.S. law. corporate retirement plans.
Unfortunately, it is commonly recognized that many Some corporate employees may be surprised
owners of companies with less than $50 million in to learn that they are fiduciaries. For example, a
retirement assets don’t really get what it means to be human resources professional learned that he was
a fiduciary. considered a fiduciary simply because he handled
questions about a participant’s benefit claim,
It can be a time-consuming responsibility, involving according to a case cited by the law firm of Winston &
intensive analysis and ongoing monitoring of the Strawn.2 Moreover, the DOL says, “…Fiduciary status
retirement plan. Even when owners understand their is based on the functions performed for the plan, not
duty, they typically don’t have the time or skills to just a person’s title.”3 Thus, it’s important to be aware
fulfill every requirement. of the responsibilities and actions that fall under the
fiduciary umbrella (see Exhibit 1).
Many owners muddle through, although their
employees may struggle to save in substandard The penalty for breaching any of these fiduciary
retirement plans, and executives may expose responsibilities could be more than a metaphorical
themselves to legal risks that imperil their personal slap on the wrist. The DOL says, “Fiduciaries
savings. who do not follow the basic standards of conduct
may be personally liable to restore any losses to
Fortunately, there’s a cost-effective solution:
the plan, or to restore any profits made through
delegating duties to an independent fiduciary.
improper use of the plan’s assets resulting from their
Employers need to understand what they’re up actions.”4 Fiduciaries are also potentially liable for
against—and the solution for these challenges. To their co-fiduciaries’ failures. A lawsuit could result in
help them, this report discusses the following: fiduciaries
• Definition of a retirement plan fiduciary and losing their personal — as well as retirement plan
employers’ duties as fiduciaries — assets. Moreover, legal fees for individuals could
• Risks of not acting as a fiduciary
• Owner’s ability to delegate some fiduciary
responsibility, thus strengthening risk 1
“Meeting Your Fiduciary Responsibilities,” U.S.
management Department of Labor, Employee Benefits Security
Administration.
What Is a Fiduciary?
2
Michael S. Melbinger and Michael P. Roche,
“Benefit Plan Sponsors Need to React to the
A retirement plan fiduciary is anyone who is named Supreme Court’s Decision in the LaRue Case,”
as a fiduciary in the retirement plan documents or Winston & Strawn Lunch Briefings (March 19, 2008),
who exercises control over the plan’s operation. This p. 49. This presentation is helpful in understanding
typically includes “the trustee, investment advisers, the employer’s perspective on fiduciary issues.
and all individuals exercising discretion in the 3
“Meeting Your Fiduciary Responsibilities.”
4
“Meeting Your Fiduciary Responsibilities.”
page 1

5. Hiring a Fiduciary
December 2009
Exhibit 1: Conditions and Responsibilities of a Fiduciary
An individual, committee, or company may be a fiduciary if it:
• Is named in plan documents as a fiduciary, though this is not necessary to be considered a fiduciary
— these fiduciaries are called “named fiduciaries”
• Exercises control over the management or administration of the plan or its assets
• Provides ongoing investment management or advice to the plan or to plan participants
• Selects or supervises other plan fiduciaries
The DOL says fiduciaries’ responsibilities include
1. “Acting solely in the interest of plan participants and their beneficiaries and with the exclusive
purpose of providing benefits to them” — Duty of Loyalty (also known as the Exclusive Benefit
Rule)
2. “Carrying out their duties prudently” — Duty of Prudence (also known as the Prudent Expert
Rule), described in more detail below
3. “Following the plan documents (unless inconsistent with ERISA)” — Duty to Follow Plan
Documents
4. “Diversifying plan investments” so as to minimize the risk of large losses, unless under the
circumstances, it is clearly prudent not to do so — Duty to Diversify (also known as Duty to
Avoid Large Losses)
5. “Paying only reasonable plan expenses” — Duty to Pay Reasonable Plan Expenses Relative
to Services Provided
Elaborating on #2, the Duty of Prudence, it is important to note that fiduciaries are held to the high
standard of a Prudent Expert — not simply a Prudent Person. ERISA explains that this requires “acting
with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent
person acting in like capacity and familiar with such matters would use.” The familiarity clause elevates
the requirement to the level of a Prudent Expert.
easily run into six figures or more. In November 2009, fiduciaries, states that there are generally three types
in Martin v. Caterpillar, the litigants filed a settlement of investment fiduciaries.
proposal calling for a payment of $16.5 million where
it was claimed that the fiduciaries had breached their First is the Investment Standard — trustees,
duties by maintaining imprudent investment options investment committee members and plan sponsors
and paying excessive fees. The settlement fund who usually have the least amount of investment
included $5.5 million in attorney’s fees. training but are responsible for managing all of the
fiduciary responsibilities regarding the investment
portfolio.
Types of Fiduciaries
The second type is the Investment Advisor — the
The Foundation for Fiduciary Studies, a non-profit
prudent experts who give advice to a retirement plan.
organization established in 2000 to develop and
advance practice standards of care for investment Third are the Investment Managers — who make
page 2

6. individual securities selections to implement the need not threaten the solvency of the entire plan to
investment mandate. reduce benefits below the amount that participants
would otherwise receive.”
Risks for Fiduciaries from Lawsuits and This has potentially huge implications for companies.
Politicians “The likely result of this decision is an increase in
Lawyers and politicians are paying more attention to ERISA litigation against benefit plan sponsors and
fiduciaries — and most of the attention is negative. other fiduciaries, including executive officers and
This happens as more people recognize that the shift board members, who are favorite targets of plaintiffs’
from defined benefit to defined contribution plans has lawyers,” according to the law firm of Winston &
endangered Americans’ retirement security. Strawn.5 Now that individuals can file lawsuits, a
company could get stung with many small, yet time-
Under defined benefit plans the employer assumed consuming, costly lawsuits.
all the risks and costs of providing the predetermined
level of benefits upon the employees’ retirement. The LaRue decision also reinforces the point that
Accordingly, the details of costs, investment vehicles, fiduciary duty is the “highest duty known to law.”
and so on didn’t matter much to plan participants This means that fiduciaries must exert themselves to
because the details wouldn’t affect the level of their understand and carry out their duties and to ensure
benefits. that other fiduciaries are also doing so. In the event
of a fiduciary breach, no excuses are accepted. A
Today, defined contribution plans, such as 401(k) and fiduciary can’t say, “I didn’t know.” The old saying,
profit sharing plans, outnumber defined benefit plans. “The buck stops here” applies to all fiduciaries. This
In contrast to a defined benefit plan, the employer’s makes it more important than ever for companies to
contribution to the plan is defined. Moreover, there pay more attention to responsibilities in this arena
are no guarantees of the benefit the employee and to hold all retirement plan advisors and vendors
ultimately receives, and the employee assumes accountable.
all risks. In a defined contribution plan, excessive
expenses, poor investment choices, and poor Government Taking More Interest in Fiduciaries
investment results subtract directly from the benefit
the employee will receive in retirement. The word “fiduciary” now pops up regularly in news
stories about investments and retirement. Just a
National leaders are looking for someone to hold couple years ago, the term was restricted to articles
accountable for this crisis. They could zero in on aimed at a narrow group of professionals. This also
employers. The bottom line for owners of small raises the likelihood of retirement plan fiduciaries
companies: there’s a rising likelihood of getting sued coming under fire.
and becoming subject to more legislative control.
For example, the SEC Investor Advisory Committee
LaRue Case Raises the Stakes created in 2009 has expressed interest in
discussing fiduciary duty. There’s a hot dispute
The U.S. Supreme Court’s 2008 decision in the among regulators, industry organizations, elected
case of LaRue v. DeWolff, Boberg & Associates, representatives, and corporations about how and
Inc. changed the outlook for retirement plans and when fiduciary duty should apply to brokerage firms’
their fiduciaries. It established for the first time that registered representatives and registered investment
lawsuits can be filed when only one plan participant advisors (RIAs). This discussion puts fiduciary duty
— rather than an entire plan — is affected by the in the spotlight. Under current regulations, registered
breach of fiduciary duty. This recognizes the shift reps are held to a lower standard than RIAs. As
from defined benefit to defined contribution plans. RIAs see it, registered reps can put the interests of
As Justice John Paul Stevens wrote, “For defined
contribution plans, however, fiduciary misconduct
5
Melbinger and Roche, p. 4.
page 3

7. Hiring a Fiduciary
December 2009
Exhibit 2: Costs Make A Difference
Total Annual Fees & Costs 1.00% 1.50% 2.00%
Annual Gross Rate of Return = 6.00%
Fixed Account Value at Retirement $173,596 $163,916 $154,846
Reduction in Final Value Due to Fees $ 21,367 $ 31,048 $ 40,118
Percentage Reduction in Final Value Due to Fees 12.31% 18.94% 25.91%
Annual Gross Rate of Return = 8.00%
Fixed Account Value at Retirement $219,326 $206,745 $194,964
Reduction in Final Value Due to Fees $ 27,789 $ 40,370 $ 52,151
Percentage Reduction in Final Value Due to Fees 12.67% 19.53% 26.75%
Annual Gross Rate of Return = 10.00%
Fixed Account Value at Retirement $278,823 $262,445 $247,115
Reduction in Final Value Due to Fees $ 36,190 $ 52,567 $ 67,898
Percentage Reduction in Final Value Due to Fees 12.98% 20.03% 27.48%
themselves and their companies first, whereas RIAs to this hypothetical participant who made the “right”
have the duty of loyalty to clients, which dictates investment decisions and earned a hypothetical
that clients’ interest must come first. Accordingly, average 8% return by $67,898 (27.48%).
some brokerage firms “have brokers recommend
their own in-house mutual funds, which carry heavy Owners Can Delegate Most Fiduciary
expense loads,” according to financial commentator Responsibilities
Bob Veres.6 When these funds appear in a 401(k)
plan, it’s clear this conflict has implications for plan Some company owners are confused about the
sponsors. extent to which they can delegate fiduciary duty.
They’ve been scared into thinking there’s nothing
Costs and Fees Make a Difference — they can do. Owners — and other company
A Big Difference employees who serve as fiduciaries because they
exercise some control over their plans’ operations
The staff of the Joint Committee on Taxation — will always have the duty to monitor other plan
prepared for the U.S. House of Representatives fiduciaries. But they can delegate much of their
Ways and Means Committee on October 30, 2007, fiduciary duty to carefully selected and monitored
a report of background information relating to independent fiduciaries. In fact, one could argue
retirement plan fees in which it concluded that “the that the company has a fiduciary duty under the
amount of fees charged against retirement plan Prudent Expert Rule to hire an independent fiduciary,
assets has a significant impact on the amount of plan if owners and employees lack extensive expertise in
assets that are available for retirement benefits.”7 It fiduciary matters.
provided the following illustration of the impact of fees
on a hypothetical participant who contributed $5,000
annually for 20 years as summarized in Exhibit 2.
6
Bob Veres, “A Swiftly Tilting Planet,” Financial
Planning (August 2009), pp. 23-24.
Costs can add up. For example, plans with costs 7
“Present Law and Background Relating to Qualified
and fees totaling 2% reduced the amount available Retirement Plan Fees,” Staff of the Joint Committee
on Taxation, (October 30, 2007), p 11.
page 4

8. The first step in delegating fiduciary duty is to figure is certification. For example, “The Accredited
out where it currently lies. All responsibility lies Investment Fiduciary® (AIF®) designation represents
with the plan sponsor, at least initially, according to a thorough knowledge of and ability to apply the
ERISA. However, it’s possible to spread some of Fiduciary Practices,” says fi360 a Bridgeville, Pa.,
that responsibility among the trustee, committees, company that offers training and the credential. The
named fiduciary, plan administrator, and investment AIF® designation falls under the Centre for Fiduciary
manager, assuming that the proper procedures are Excellence, an independent global assessment and
followed. certification organization. This ensures that standards
are set high.
It’s easy to get confused about which outsiders act
as fiduciaries in the complete sense of the word. The Standards of Fiduciary Excellence from
Brokers may be genuinely concerned about the fi360 provide a detailed checklist of issues that a
plan’s interests, but, as discussed above, they’re retirement plan trustee or independent fiduciary
not legally required to put client interests first. Some should review to minimize their exposure to fiduciary
vendors may talk up their roles as “co-fiduciaries,” liability. Companies should seek an independent
while limiting their actual responsibilities by adding fiduciary that can assess their plan’s compliance with
technical legal language to their service agreements. these standards and then fix things if the company
Unlike a fiduciary, a co-fiduciary has to act only when falls short of satisfying the standards. This will
another fiduciary breaches their duty or when they minimize the risks associated with the plan.
are required to pursuant to their service agreement.
Also, contracts may favor the vendor at the The goal of risk management for fiduciaries is to
company’s expense. For example, some registered optimize plan participants’ results, while minimizing
reps working for brokerage firms call themselves personal liability exposure. To manage 401(k) plan
“co-fiduciaries” but won’t acknowledge their fiduciary risks effectively, companies need rigorous processes
status in writing. These reps “may be only assisting that they and their vendors follow carefully, while
the fiduciaries in choosing investment options” and documenting their actions. Once the company has
don’t have the authority or ability to buy or sell plan selected an independent fiduciary, it can delegate
assets. As a result, the company owners sponsoring much of this to the fiduciary.
the retirement plan — not the brokers — still bear full The independent fiduciary will manage risks (see
responsibility and liability for investment decisions. Exhibit 3) — especially the risk that the fiduciaries
Once a company sorts out the above-mentioned may be sued for paying excessive fees or conducting
issues, it can select an independent fiduciary who will insufficient due diligence — the two most frequent
assume all day-to-day investment and administrative areas of claims against fiduciaries.
duties, including selecting the menu of investment Hiring an independent fiduciary with the right
options and hiring/firing providers. A special rule experience and knowledge leaves the company
allows companies to appoint an independent and owners with the need only for residual monitoring.
qualified investment manager who is granted That means owners can focus on running their
discretion and authorized to buy and sell plan assets. companies instead of grappling with complex,
This manager is defined by ERISA as a registered technically demanding analysis and decisions.
investment advisor, a bank or insurance company
who acknowledges his or her fiduciary status in
writing. The acknowledgement of fiduciary status by
this person or firm is critical.
When plan sponsors wish to delegate some or most
of the plan’s fiduciary responsibilities, they should
seek firms that understand the meaning of “fiduciary”
and that know how to measure risks. One measure
page 5

9. Hiring a Fiduciary
December 2009
Exhibit 3: Key Areas for Risk Management
Costs, expenses, and
Plan sponsor must be
compensation associated Main requirements
careful to:
with investments
Investment & administration • Must conduct extensive due • Compare services and costs
fees diligence at which they are offered
• May pay reasonable fees • Compare the plan and its
from the plan’s assets investments to those of other
firms
• Avoid choosing a higher-
priced offering when a
comparable lower-priced
offering is available
• Allocate expenses fairly
• Disclose costs, including
transaction costs and
revenue-sharing, to plan
participants
Bundled services & revenue Current litigation, • Act with an understanding
sharing Congressional legislation, and that bundled 401(k)
DOL regulations are in the administration is not “free” to
process of setting rules about participants
what information should be • Understand what costs and
disclosed and how payments are associated
with a share class, how they
compare with other share
classes, and who gets paid
what by whom
Ongoing monitoring • Monitor plan providers, • Create appropriate
investments and fiduciaries procedures
• Stay aware of timely issues • Maintain records showing
in investments that procedures are followed
page 6

10. If you have questions about any of these issues, please contact Allan Henriques, AIF®, of Smart
Investor at (916) 435-2100 or allan@smart-investor.cc.
Allan Henriques, AIF®, AIFA®, J.D., is the founder and president of Smart
Investor, a Rocklin, California-based wealth management firm that also acts as
an independent investment fiduciary. Allan is an Accredited Investment Fiduciary
and former attorney with 15 years of legal experience and more than 20 years of
financial services experience. He enjoys freeing his retirement plan clients to focus
on managing their businesses profitably. Smart Investor specializes in working with
entrepreneurs and small business owners who don’t have the time to efficiently
manage their personal investment and tax planning. The firm also provides cost-
efficient charitable trust administrative services for individual and institutional
clients.
Smart Investor’s team of highly-skilled professionals provides extraordinary client service. In helping clients
achieve their personal objectives and have fun with life, the Smart Investor staff personifies the firm’s core
values of respect, integrity, and valuing and giving back to clients’ and employees’ communities. Smart Investor
employees are personally involved with local charities and Allan serves on the board of directors of the Boys
and Girls Club of Auburn (California).
Smart Investor
5800 Stanford Ranch Road, Building 800
Rocklin, CA 95765
(916) 435-2100
www.smart-investor.cc
Hiring a Fiduciary Can Reduce Company Owners’ Headaches and Improve Employees’ Retirement Prospects
By Allan Henriques, AIF®, AIFA® J.D.
© Copyright 2009 Smart Investor. All rights reserved.
No part of this publication may be produced or retransmitted in any form or by any means, including, but not limited to,
electronic, mechanical, photocopying, recording or any information storage retrieval system, without the prior written
permission of the publisher. Unauthorized copying may subject violators to criminal penalties as well as liabilities for
substantial monetary damages up to $100,000 per infringement, costs and attorneys fees.
The information contained herein is accurate to the best of the publisher’s knowledge; however, the publisher can accept
no responsibility for the accurateness or completeness of such information or for loss or damage caused by any use
thereof. This information is not intended to be a substitute for specific individualized legal advice.
page 7

12. 5800 Stanford Ranch Road, Building 800 9 Rocklin, CA 95765 9 (916) 435-2100 9 www.smart-investor.cc