courtroom Let's review alittle of the past history of 401(k) lawsuits. (Photo:iStock)

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How much responsibility do you have for those you associatewith? Will you be held accountable for the mistakes they make?

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If it's your job to hire them or direct them, then the answersto both these questions are "yes!" Just ask any pro sports coach,manager, or team executive. If you can't get your players toperform, you can probably get away with lopping off a few of theirheads. But, beyond a certain point, it's your head on theplatter.

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The same holds true for business, especially the investmentadviser business. If you've got discretion, what happens to theunderlying companies in your portfolio can count against you. Andwhat happens if those underlying companies go on the record sayingthey no longer place shareholder interests as their primary duty(see "Did Business Roundtable Just Break a Fiduciary Oath?"FiduciaryNews.com, August 29, 2019)?

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Before considering this, let's review a little of the pasthistory of 401(k) lawsuits.

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The first wave of these lawsuits involved service providers whoplaced employee retirement assets in high fee shares when low feeshares were available for the same fund. For the most part, thiswas the result of a clear conflict of interest. Those providersbenefited from recommending plan sponsors pick the higher fee shareclasses. The employees received no comparable benefit.

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What happened when these early cases were decided?

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Again, for the most part, the service vendors got off the hook.Since they were, in effect, merely selling, not advising, theycouldn't be held to any fiduciary standard.

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But, as Harvey Keitel's character told Nicolas Cage's characterin National Treasure, "Someone's got to go to jail, Ben."

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Indeed, so egregious was the conflict of interest in thesecases, someone had to be held accountable for the damage done tothe employees.

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Who was that someone?

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It was none other than the not-so-innocent, albeit very naïve,plan sponsor.

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Yep, the folks who were busy running the company, knew theyneeded help, and trusted the folks they hired to help them.

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Trouble was, 401(k) plan sponsors apparently weren't in tunewith the concept of their fiduciary liability at that point. Thosecourt cases, therefore, were certainly handy in exposing thatliability. Because they didn't directly benefit from the conflictof interest that benefited their service providers, we'll call this"secondhand" liability. It's just as lethal as "firsthand"liability, it just means you weren't malicious in the act.

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Fast-forward to today. There may be a different of secondhandliability brewing. And future tort lawyers may harken back toBusiness Roundtable's latest decision to de-prioritize shareholderinterest as its beginning.

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Let's be clear on one thing: There's a reason why CEOs decidedthey aren't working solely in the best interests of theshareholders anymore. Quite simply, the markets they're selling todemand it (N.B., we are not referring to investment markets, but,rather, consumer and political markets).

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Savvy marketers know the importance of giving the customer whatthe customer wants. (Or at least showing the appearance of givingthe customer what the customer wants.)

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It's only natural, then, that CEOs seek to appeal to thepopularity of socially responsible activities. This is why evenfossil fuel companies (like BP and Exxon) are making strides toestablish and emphasize their "green" cred.

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And there's very little that prevents CEOs from using companyassets to promote this public policy position. Experts feel thisclassic corporate governance conflict has never been fullyresolved; thus, it acts as a bit of a legal shield that protectscorporate executives.

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It's the same kind of technicality that protected non-fiduciary401(k) service providers during those early court trials.

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So, public company CEOs might be off the hook, but, alas,someone's got to go to jail, Ben.

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Let's say you're a fiduciary and knowingly place employeeretirement assets into investments whose executives publicly statethey no longer have to work solely in the shareholders' bestinterests. What happens when that investment significantlyunderperforms alternative investments, ones whose companyexecutives continue to place the shareholders' best interestsfirst? Who's left holding the bag when the inevitable class-actionlawsuit arrives?

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It won't be the CEOs. They gave investors fair warning withtheir disclosure.

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That leaves the professional fiduciary who bought thoseinvestments.

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That could be you.

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Scared yet?

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READ MORE:

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A 3-word fiduciary rule — Carosa

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The 'Fiduciary Rule' versus the 'Rule of Fiduciary'— Carosa

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Do you have the 'knows' to be a fiduciary? —Carosa

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Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).