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Fred Reish

The Enduring Wisdom of Fred Reish

Lessons learned from recent defined contribution plan litigation.

I have heard Fred Reish speak innumerable times starting in the late 1990s when he declared that commission-based advisors acting as functional ERISA fiduciaries were putting their tens of billions of commissions at risk, which led to a rush to fee-based, fiduciary status. So when Reish lectured to C(k)P candidates last week on the UCLA campus, I did not think I would hear anything new about lessons from recent litigation. But after reviewing my two pages of notes, I realized what he communicated, even if not new in concept, was so elegant and wise I thought it was worth sharing.

Industry speakers are limited at C(k)P training as candidates told us they did not want speakers they could hear at industry conferences. It is hard to explain how the C(k)P training is dramatically different—one advisors said it was like hearing one Ted talk after another—because two-thirds of the lecturers are UCLA Anderson professors covering topics like behavioral finance, leadership, understanding your future self, branding and marketing, leading technology, and principles of persuasion and influence.

Only a diversity of ideas, industries and people lead to breakthrough innovation, a lesson taught by UCLA Professor Shlomo Benartzi bringing together psychology and finance and then academia and the DC industry. C(k)P training attempts to do the same, bringing academic rigor and insights to the DC world with luminaries like Reish the exception to the no-industry-speaker rule.

Here are some pearls of wisdom, clarity and reminders I noted from his lecture last week:

  • Will litigation come down market and will advisors be a target? Reish said plans with as little as $50 million were being targeted as were 3(38) advisors, but he doubted it could go lower as the potential damages and consequently attorney’s fees were limited. It is possible, however, that local attorneys not specializing in DC plans could copy the complaints of larger cases and be happy with modest settlement just like with slip-and-fall cases.
  • Do lower-cost CITs present risk to plans that do not use them if fees are significantly lower, just like with lower-cost share classes? Reish did not think so as fiduciaries could argue that they like the protection and oversight of mutual funds. That argument becomes harder to make when the CIT almost exactly mirrors the mutual fund.
  • Outspoken committee members are our friends especially when they question advice provided by their fiduciary advisor. Those members that just go along without question put the plan at risk.
  • The U.S. Supreme Court in the recent Hughes case highlighted the difference between rules and principles—the latter can change over time. It seems like the difference is between being a fiduciary, who follows the rules, and a steward, who always keeps the best interest of the client in mind, which may change over time and circumstances.
  • Plan sponsor fiduciaries often wear two hats: 1. Looking out for the interests of the plan and 2. Looking out for the interests of the organization. But when there is a conflict, the plan’s interest comes first.
  • If a plan benchmarks fees and finds they are paying above-market rates and then do nothing, they are putting themselves at risk just as if they do not follow their investment policy statement, which, according to Reish, can be amended just by committee action.
  • Finally he noted plans and their advisors do a terrible job communicating to participants how much they do for them, implying that if they did, there would be less dissatisfaction and possibly litigation.

So not all new insights or lessons from Reish, but a wonderful refresher course about how to not just avoid litigation and DOL fines but also how ERISA plans should be run in the eyes of the courts, which are weighing in more and more as DC plans supplant pensions and become essential to the financial well-being of tens of millions of Americans.

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.

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