Cheaper Isn’t Always Better, but a Prudent Process Is

by: , DCIO National Account Senior Associate, New York Life Investments

While assessing the current state of the defined contribution retirement landscape, there are a number of themes that continuously emerge for plan sponsors (fees, litigation, returns – or lack thereof –, benchmarks, and active vs. passive management, just to name a few).

Plan sponsors and advisors may assume that they need to search for and find the lowest-cost investments to fulfill their fiduciary duties to avoid potential litigation. However, this approach could actually lead to potential problems.

Neither The Employee Retirement Income Security Act of 1974 (ERISA) nor the Department of Labor’s (DOL) Fiduciary Rule requires a plan fiduciary to hunt for the lowest-cost fund.

Moreover, courts have agreed that finding the lowest-cost fund is not a requirement, most notably with a Seventh Circuit ruling on Hecker v. Deere & Co., in which the court stated: “The fact that it is possible that some other funds might have had even lower ratios is beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).”

The January 2017 Department of Labor FAQs pertaining to the Fiduciary Rule remained consistent on this point in talking about investment advice fiduciaries:

  • Q17: Does the best interest standard mean that my financial adviser must search for and identify the absolute best product for me?
  • A: No. The best interest standard requires that your adviser act prudently and that he or she put your interests first, but it does not require that he or she somehow scour the market and identify the single best investment product for you out of all the investments in that vast market. The adviser’s obligation is not perfection, but rather to make recommendations that adhere to a professional standard of care and that are based on your financial interest, without regard to his or her own competing financial interests.If an advisor makes recommendations from a limited or specialized menu, however, he or she may not always be able to make a prudent recommendation that meets the best interest standard. In such cases, the advisor may conclude that he or she cannot make a prudent recommendation to a particular investor because of the restrictions on the scope of his or her recommendations (e.g., if the consumer requires a degree of liquidity that is inconsistent with the particular products the advisor recommends). An advisor that specializes in real estate or specialized notes, for example, could turn away some customers because the limits of his or her expertise and those investment products are a poor match for those customers.

The key takeaway is simple, perfection is not required, nor is the need to scour a universe of thousands of funds and service providers alike to find the so-called “best” product, investment, or recordkeeper for a client. A prudent process is, however, an obligation of fiduciaries, and it is this procedure that needs to be applied consistently. While there is no foolproof method to avoid all potential issues, plan sponsors should think critically, while openly communicating with their advisors about which solutions will be solely in the best interest of the plan and plan participants.

This article is for educational purposes only and may not be redistributed by the recipient without prior written consent from New York Life Investment Management LLC. This communication is not intended to be an offer or solicitation of investment advisory services or products.
Neither New York Life nor its agents or affiliates provide tax, legal, investment, or accounting advice. Plan sponsors should speak to their own tax, legal, or investment advisor or accounting professional regarding their specific situation.

The information contained herein is general in nature and is provided solely for educational and informational purposes.

All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds® are managed by New York Life Investment Management LLC and distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC

Prepared for an Institutional Audience.


Jeffrey Zielinski, CRPC®, CRPS®

DCIO National Account Senior Associate, New York Life Investments

Jeffrey Zielinski is a DCIO National Account Senior Associate helping cover our home office and field relationships. He joined New York Life Investments in 2016. Previously, Jeff’s experience includes John Hancock RPS (Formerly New York Life RPS), ADP Retirement Services, and

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