An Interview with Brooks Hamilton

brooks-hamiltonBrooks Hamilton is an independent pension fiduciary and founder of Brooks Hamilton & Partners. Brooks is a native Texan and received a Bachelor of Science Degree from the University of Houston in 1958, and his Juris Doctor Degree from Southern Methodist University School of Law in 1963. Starting at age twenty-two, Brooks has now worked continuously and exclusively in employee benefits for well over forty years.  Many credit Brooks with identifying and confronting what the media has labeled “yield disparity” – that is, the huge gap between the 401k investment performance of the few who do well versus the many who do poorly. TV appearances have included CBS Evening News, FOX News, Kiplinger’s TV Financial News, a PBS Frontline Special “Can You Afford to Retire?” produced by Hedrick Smith, and most recently, a 60 Minutes program on 401k Plans where Brooks was interviewed by Steve Kroft.

BrightScope: Brooks, you have been in this industry for over 40 years. Can you describe your current business and how it has evolved over the years?

Brooks Hamilton: After decades of striving to be the major influence regarding my client’s retirement strategy, and thus likely a key factor if not in fact the deciding factor regarding my client making the proper decisions regarding their retirement strategy, I recently made a sea change in my professional service offering.  Now I simply recommend to any legitimate prospective client that they outsource all fiduciary decision making to an independent fiduciary; that is, to me or to an independent fiduciary professional like me. So, instead of management making dozens of important decisions regarding the design, administration, operation, communications, evaluation, et cetera, of their retirement plan, pursuant to the influence exercised by perhaps a dozen others, they make just one decision: outsource all fiduciary decision making. My initial impression has been that once the elegance of this simple approach clicks in, management loves the idea. As evidence of its appeal, a large national plan recently named Brooks Hamilton & Partners the “Named Fiduciary” and “Plan Administrator” in the Plan document, with explicit power to hire/oversee/fire all plan providers. Sea change indeed.

BrightScope: Your experience in the industry gives you a unique perspective regarding how effective ERISA has been at securing retirement income for participants. Do you think the current system is working?

Brooks Hamilton: No, not at all.  If >90% of the students in a school system failed, we’d conclude that education in that system had failed.  Likewise, if >90% of our brave Service men and women were casualties in a battle, we’d also conclude that our military leadership had failed in that battle.  So, when over 90% of our workers are on track to retire in despair and run out of money about half-way down their life expectancy road why the reluctance to call a spade a spade, and simply state the obvious?  The current retirement income system is not working.

BrightScope: What do you make of the recent court decisions about fee disclosure and revenue sharing?

Brooks Hamilton: Pathetic; no, actually shameful. I remember being taught in law school that a Motion for Summary Judgment was hardly ever granted, as a Court granting such a Motion had to assume the truth of every allegation made by the plaintiffs, and conclude, basically, so what?  To illustrate, assume a complaint alleges that a neighbor’s son is a Boy Scout, and asks the Court to award damages of $100,000. Now assume the neighbor files a Motion for Summary Judgment – it will be granted, as no cause of action has been alleged. But this result is a very rare situation, for obvious reasons.  I was also taught that even a first year law student is able to write a Complaint making a case which if all is assumed to be true would survive what I have come to call the ‘so what?’ test. And yet, with some of the best and brightest ERISA attorneys in America writing Complaints alleging, among other wrongdoing, acts of willful indifference by “fiduciaries” vis-à-vis plan participants whose interests such fiduciaries are commanded to place ahead of all others, the Courts appear to yawn, exclaim ‘so what’, and toss the plaintiffs out on their ear for failing to even state a claim, and in one well-known case, refused to even have a hearing. Pathetic; shameful. In fact, unbelievable! Or, as I have heard others vent, shades of Star Chamber (over time Star Chamber, an English Court of Law, evolved into a political weapon and has become a symbol of the misuse and abuse of power by the courts).

BrightScope: Do you think that the establishment of a fiduciary standard for all providers of investment advice will help protect participants?

Brooks Hamilton: It will help, but probably not be decisive. One implication of the Milosfsky case is the idea that perhaps the Named Fiduciary should have taken the lead in holding the non-fiduciary service provider accountable for the losses. That failure to act against the record-keeper could be, in itself, a breach of fiduciary duty for the Named Fiduciary. The first step for any ERISA litigation initiated by participants today probably ought to be, but almost never is, an attempt to get the fiduciary to act as a fiduciary.

Without a strong, independent, and protective fiduciary foundation on which to center ERISA enforcement, plan participants are going to continue to be mired in the kind of Bleak House Chancery practice that Dickens so famously described, to wit:

“This is the Court of Chancery . . . which gives to monied might, the means of abundantly wearying out the right; which so exhausts finances, patience, courage, hope; so overthrows the brain and breaks the heart; that there is not an honourable man among its practitioners who would not give-the warning, ‘Suffer any wrong that can be done you, rather than come here!”

Bleak House was the ninth novel by Charles Dickens, published between March 1852 and September 1853.  It is held to be one of Dickens’s finest novels, and is emblematic of the failure of Chancery revealing the flaws of the British judiciary system.

BrightScope: BrightScope has been a big advocate of fee transparency. Do you think full transparency of fees will help fiduciaries better manage 401k plans?

Brooks Hamilton: It should; but we must recognize that the fundamental architecture of 401k Plan design is such that fiduciaries are really spending other people’s money to pay service providers for services delivered to other people.  Query: do I care, really, if a friend is getting a good deal on his cell-phone minutes?  If I am the person responsible to select my friend’s cell-phone provider, will it help me do a good job if the cost of his minutes is more transparent? Your readers should take a hard look at The 4 Ways to Spend Money by Milton Friedman.  It is no coincidence that the most inefficient method to spend a dollar, according to this recipient of the Nobel Memorial Prize in Economic Sciences, is the very method upon which the 401k paradigm has been erected.

BrightScope: At times in the past you have criticized ERISA pre-emption. What is your current thinking on that issue?

Brooks Hamilton: I am still in shock that in Scalia’s decision the Supremes simply declined to first craft, and then apply, a reasonable ERISA remedy to facts and circumstances where they had concluded that Congress “forgot” to provide one, after Congress had destroyed via a global, unconditional preemption all pre-existing remedies. Frankly, this audacious act could inevitably lead to what I’ll call “democratic tyranny” – in short, is there any new federal law that Congress could not enact, in order to regulate a particular economic, business, and/or social, et cetera condition, and then by means of an imbedded global preemption clause, void all other laws and pre-existing remedies, without regard to whether such laws and remedies had previously been intended by state, federal, or even the common law to assure justice?  Shades of George III. Isn’t this what ERISA did?  That is, a remedy fabric, which had been spun for centuries to deliver a rational and moral justice to “we the people” ever since Magna Charta, was willfully shredded by Congress, and yet, as Scalia observed, Congress at the same time apparently “forgot” to establish a new set of remedies to a near infinite number of wrongs. Isn’t the impossibility of bureaucrats mentally conceiving such a morally justifiable framework of justice really a core reason why Socialism has never gained traction? As well as why Smith’s invisible hand has been able to weave such a sound, moral framework over time and doesn’t the supremacy clause in the Constitution make such a totalitarian and despotic preemption provision unnecessary in the first place? Frankly, our Founders were better men than to consider imposing a law voiding all existing remedies, while providing none, upon We the People; have we lost our way?

BrightScope: Can you give our readers an example of how pre-emption works?

Brooks Hamilton: To illustrate, case law is emerging that when health care due under a Plan is wrongly denied to a Participant, and the person denied such care dies as a result, his/her family can sue the pants off the person/entity wrongfully denying and withholding such a benefit, under common, state, and/or other laws providing a remedy when ERISA provides none. And in so doing, be entitled to a jury; compensatory damages; punitive damages; legal fees; et cetera. In short – the deceased victim’s champion will enjoy access to all of the laws s/he had before ERISA as they are in play. This result should apply to retirement type benefits, as well as to healthcare. Where the participant is dead due to benefit denial, it is ludicrous to sue under ERISA to enforce benefit delivery. Ditto where the healthcare benefit was delivered in a careless and negligent manner (say the surgeon was drunk and carelessly/negligently killed his patient).

The problem is not that the benefit due was not delivered; the problem is that the benefit due was in fact delivered, but was defective. Just as a participant can sue for medical malpractice, and ERISA does not preempt such a suit, so can a 401k participant sue for financial malpractice. That is, having a $100,000 benefit delivered, due to financial malpractice, when $1,000,000 should have been delivered. All plaintiff litigation have, in my opinion, mounted a dead horse headed in the wrong direction.

BrightScope:  Why do you think judges are “ERISA novices” as you have indicated in your writings?

Brooks Hamilton: Judges “appear” to be ERISA novices at their very best, or so it seems to me. Some may indeed even have a heartfelt bias, or perhaps an honest predisposition regarding fundamental ERISA issues, which in the altogether render them fundamentally indifferent, if not viscerally opposed, to the fiduciary standards imposed by ERISA.  It must be remembered that “Trust law” as a descendant of the Common Law was not a basic part of federalism in the first place.

BrightScope: Thank you for speaking with us.

Brooks Hamilton: Thank you.

Interview disclaimer: Brooks Hamilton’s views are his own and do not necessarily reflect the views of BrightScope Inc.