Does Better Fiduciary Process Lead to Better Performance?

Here's an interesting post titled "Does Adherance to the Practices Really Make a Difference?" from the Fi360 Blog.  One of the mantra's of the Fixing the 401(k) Approach is that "better process leads to better decision-making which, over time, increases the probability of better outcomes."  

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Rich Lynch, COO of Fi360, essentially makes the same argument and backs it up with some interesting data points from a recent study conducted by the U.S. Government Accountability Office (GAO) which is an independent, nonpartisan agency that works for Congress.  

In a previous post, I wrote about the fiduciary duty to uncover conflicts of interest when hiring a retirement plan advisor.  In it, I referenced an SEC study from 2005 that raised issues regarding the independence of the advice provided by pension consultants.  

The GAO study Rich references is entitled, "Private Pensions - Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans" and is a follow-up to the SEC study that was published in March 2009.  The GAO analyzed the lack of disclosure regarding conflicts of interest and the impact on returns of defined-benefit (DB) plans from 2000-2004.

The GAO conducted an "analysis of available data on pension consultants and plans revealed a statistical association between inadequate disclosure and lower investment returns for ongoing plans, suggesting the possible adverse financial effect of such nondisclosure."  The study detected statistically significant lower annual rates of return of 1.2 to 1.3 percentage points from 2000 to 2004 when consultants did not adequately disclose conflicts of interest.   The GAO is careful to make the point "that this finding should not be considered as proof of causality between conflicts and lower rates of return, although it suggests the importance of detecting the presence of conflicts among pension plan consultants." 

Rich cited Practice 1.4 of Fi360's Prudent Practices for Investment Advisors handbook which says "Fiduciaries and parties in interest are not involved in self-dealing" as evidence that there is the strong possibility of the link of better fiduciary process leading to better performance.  

You can read the GAO's executive summary and download the full report, here.