In general, a fiduciary has the duty to know about any payments made from Trust assets. It is also the fiduciary’s duty to know of and monitor the compensation paid to all Plan service providers to determine if that compensation meets a reasonable standard (as per language from the DOL). This duty applies to any Plan service provider (party-in-interest) whether the vendor serves the Plan in a fiduciary capacity or a non-fiduciary capacity.

We recently learned of a speech given by Edward Siedle, President of The Benchmark Companies to a conference held in Austin, Texas on September 25th 2003. Mr. Siedle’s speech entitled Emerging New Fiduciary Trends and Developments: Systems of Mass Deception vs. Systems of Enhanced Diligence has been published by Benchmark Companies and can be found on their website www.benchmarkalert.com. Mr. Siedle has been a vocal critic of the investment business because of its lack of disclosure and transparency and what he sees as rampant conflicts of interest. The article is especially relevant for Plan Sponsors of defined benefit plans.

Regarding the fiduciary duty to monitor, disclose and understand compensation practices: we ask the following questions:

Do you have a compensation disclosure on file from your securities broker or investment advisor? Does it contain details as to formula, timing and amount of payments? Is the broker or advisor receiving any non-cash compensation in the form of sales incentives, soft dollar reimbursements, or directed brokerage arrangements? Do you have a statement on file that summarizes the compensation received by your broker/advisor for all soft-dollar arrangements?

If you utilize the services of an investment consultant or consulting firm, do you have written disclosure of any additional relationships between the investment consulting firm and the investment managers they recommend? Some consulting firms require a payment from investment managers toward the costs of the consulting firms seminars, institutes, etc. This allows the firm to collect a substantial fee (Denali FM has learned of amounts up to $55,000) just to attend a conference in which the firms consultants will be available for introductions. Given that the consultants control the investment searches, this payment scheme, known as pay to play, is nothing more than a sophisticated method to institutionalize an inherent conflict of interest.

There are numerous forms of pay-to-play that affect your Plan including the payment of shelf space fees in which the advisor pays a third party to provide marketing services to the advisor. The fees used to be equal to 12b-(1) fees but have risen in recent years to as much as 45 basis points. That fee is paid every year, long after the customer has become an owner of the shares in the investment fund and long after the distributor is involved in the actual distribution of the fund.

Do you have written disclosure on how much compensation your record keeping and administration services provider receives from any investment offered in your Plan? These fees are sometimes known as sub-transfer agency fees, recordkeeping offsets or revenue sharing payments. In most cases such payments may have been blessed by various Prohibited Transaction exemptions from the DOL. Exempt from the PT rules or not, you as Plan Sponsor must still know about them and evaluate their reasonableness (in a commercial context) on an annual basis. Have you ever wondered why such fees are asset-based as opposed to a dollar-per-head calculation? Why are service fees paid for by a piece of the assets as opposed to a flat fee?

In recent years, mutual fund expense ratios have risen. There is no magic to this. As vendors have been asked to do more for their clients they pass along their costs to the investors, not to Plan Sponsors. While this may seem like the natural flow of things we note that the higher the expense of the investment funds in your Plan, the lower the rate of return to your plan participants, all other factors being equal. At some point, investment expenses must be contained. What discussion have you had on this topic in your Plan Committee? If it hasn’t been an agenda item, why not?

Do you have a disclosure as to how much compensation your administration services vendor receives from non-proprietary funds offered by virtue of their supermarket (distributorship) arrangement? According to one friend in that end of the business the distributorship fees are at an all time high. He recently informed us of one fund company that pays as much as 60 basis points to his organization to be promoted.

Do you have a disclosure as to how much compensation is generated by the brokerage services used by the investment funds in your plans? Such information is not contained in the prospectus but in the funds Statement of Additional Information. In one recent case Denali FM examined, the funds brokerage expenses were greater than the funds investment advisory fees.

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