There Are No Mulligans in Fiduciary Law

Webster’s dictionary defines a mulligan as “a free shot sometimes given a golfer in informal play when the previous shot was poorly played.” While various organizations are currently promoting various erroneous definitions of “fiduciary” and what a fiduciary’s duties include, as the Supreme Court noted in Tibble v. Edison International,(1) the courts usually look to the Restatement (Third) Trusts for guidance on fiduciary questions, especially in cases involving ERISA.

The issue of erroneous fiduciary definitions recently was spotlighted when Secretary of Labor Acosta testified before a Senate committee. In responding to a question posed by Congressman Robert Scott, D-Va., with regard to the department’s enforcement of their new fiduciary rules, Acosta responded by saying that

If companies are not proceeding in good faith [with the best interest standard], we still have enforcement authority. So if there are willful violations, we do have enforcement authority.

Huh? “Good faith” and “willful violations” as defenses, or perhaps more accurately loopholes, to breaches of one’s fiduciary duties. Mr. Secretary, as an attorney, you know, or should know, that the courts have consistently held that “a pure heart and an empty head” are no defense to allegations involving the breach of one’s fiduciary duties.(2) Any violation of one’s fiduciary duties, whether willful or not, are actionable, as a fiduciary ‘s duties are the highest known at law. A fiduciary liability for any mistakes is essentially absolute…no mulligans!

The courts and the regulators, as well as the Restatement, have consistently held that good faith alone is not a defense a breach of one’s fiduciary duties. Some examples include:

When a trustee “violates a duty because of a mistake as to the extent of his duties…he is not protected because he acts in good faith nor is he protected merely because he relies upon the advice of counsel.”(3)

ERISA’s reference to good faith is limited by the “overriding duties imposed by [ERISA Section] 404.(4)

“[A] fiduciary’s subjective good faith belief of his prudence will not insulate him from liability”(5)

“ERISA does not excuse a fiduciary’s breach of duty because the fiduciary acted in good faith.”(6)

“The fiduciary’s subjective good faith belief in an investment does not insulate him from charges that he acted imprudently.”(7)

A Test For Acosta and the DOL Truth-O-Meter
If we take Secretary Acosta at his word regarding pursuing enforcement for willful violations by companies not acting in good faith, then it will be interesting to see how, or if, the department will pursue the sale of variable annuities in connection with pension plans and plan participants. Variable annuities are annually among the top investments involved in customer complaints. Statistics show that the highest percentage of variable annuities sales are within pension plans and to plan participants.

There is a saying in the investment industry – annuities are sold, not bought. When one understands the high fees and associated costs associated with most annuities, especially variable annuities, and the impact of such fees and costs, the truth of the saying is clearly obvious. Since the cumulative fees and costs associated with variable annuities typically run in the 2-3 percent range, and each additional 1 percent in costs reduces an investor’s end return by approximately 17 percent over twenty years, a variable annuity investor could easily see over of their returns going to the variable annuity issuer in the form of fees and costs. So much for “retirement readiness” and “financial wellness.”

Moshe Milevsky’s study(8) of variable fees concluded that the fees charged by the average variable annuity, even in the best case scenarios, were 5-10 higher than the actual economic value of the benefit conveyed, thereby providing a windfall for the variable annuity issuer at the variable annuity owner’s expense. Fiduciary law is based primarily on the common law of equity. A basic axiom of equity law is that equity abhors a windfall. Therefore, the fact that most variable annuities produce a windfall for the issuer effectively negates any argument that recommendations of variable annuities to pension plans and plan participants cannot be said to be made in “good faith” and are therefore “willful” violations of one’s fiduciary duties. So, will we see enforcement actions initiated by Secretary Acosta and the department, or was this empty rhetoric by Secretary Acosta to placate Congress?

Simple, easily verifiable facts, especially by attorneys such as Secretary Acosta and the excellent attorneys there at the Department of Labor. Throw in the added fact that Secretary Acosta’s newly created loopholes, “good faith” and “willful” are inconsistent with long-standing fiduciary law, and the burden on Secretary Acosta and the department is to do their job and truly enforce the new fiduciary rule in order to carry out the department’s mission statement – to protect American workers and pension plan participants.

1. Tibble v. Edison International, 135 S. Ct. 1823, 1828 (2015)
2. Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983)
3. Restatement (Second) of Trusts §201 cmt. a (1959)
4. Cunningham, 1467
5. Reich v. King, 867 F. Supp. 341, 343 (D. Md. 1994)
6. Martin v. Walton, 773 F. Supp. 1524 (S.D. Fla.1991)
7. Lanka v. O’Higgins, 810 F. Supp. 379, 387 (N.D.N.Y. 1992)
8. Moshe Milevsky, “Confessions of a VA Critic,” Research Magazine, January 2007, 42-48

© Copyright 2017 The Watkins Law Firm. All rights reserved.

This article is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.


About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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