Home>Financial Articles and Q&A>Articles>Five Things You Must Be Aware of as a...

Five Things You Must Be Aware of as a Plan Fiduciary

Although you have a choice of over 300,000 advisors to help your company with choosing and managing a 401(k) plan, it can be hard to narrow the field. Perhaps Fred Barstein, Founder & Executive Director at The Retirement Advisor University (TRAU), can help. He has found that there are over 300,000 advisors that have sold between one to three 401(k) plans, 15,000 advisors who have sold more than five plans, but only 5,000 who have sold over 10 plans or manage over $100 million, called “The Elite 5000” *.

Why is it so important to choose your 401(k) financial advisor so carefully? The answer is simple: the word “fiduciary”. A fiduciary is someone who is managing the financial assets of another person, and within a company, there can be more than one fiduciary.  If you are offering your employees a 401k plan, then most likely you are a fiduciary, and if you are, you have certain responsibilities by law.

1. Not realizing who is a fiduciary – and how that might affect you

Knowing that you ARE a fiduciary is, obviously, the first thing you need to be aware of, because there are legal requirements that need to be followed. Many fiduciaries do not know that by not following the basic standards of conduct, they are likely to be personally liable to restore any losses to the plan. And “personally” actually means the individual, not the company—a crucial point of fact. An experienced advisor will be more capable of assisting with fiduciary risk management concerns with employees.

2. §408(b)(2) The New Fee Disclosure Rules…

 The second item to watch for is fee disclosure, something that the government has been talking about since the 2006 Pension Protection Act, and should be coming into effect this year. Not only do trustees need to know what fees they are paying to the manager of the fund, but they also need to disclose that to the employees. Many employers—and trustees—are unaware that paying “reasonable” fees is one of the key duties of a fiduciary. Many business owners do not have the time or experience to sort through the investments and fees, which is why a company needs an objective consultant who can help identify and understand what services and benefits are being purchased, and pinpoint the fees.

A qualified consultant will thoroughly assess a company’s situation to cut out unnecessary fees.   Many top consultants already disclose fees on their statements and don’t work with managers with layers of hidden fees, making it easier for the trustee to keep on top of fee disclosure.

3. Having a process to select your managers

The third item that fiduciaries need to be aware of is 401(k) plan options. Not only is it wise to give their employees a diverse amount of options to choose from, they also need to make sure that the investments are being monitored in a systematic manner.  This means that fiduciaries need to have a process in place in how they select their managers. The best consultants are those that are not locked into a single investment company, but those that can hand pick the most suitable managers and exchange them for a more suitable manager if they fall short in their responsibilities.

4. Not removing managers from your plan menu

Item four: an advisor should not just set up the 401(k) plan and set it on auto-pilot. One of a fiduciary’s responsibilities to the employees is to have a process that will outline how a manager may be replaced. Many brokers do not continually monitor their 401(k) plans, like a fiduciary consultant might.  For instance, Romero and Levin Wealth Management’s consultants compare managers against their peers to ensure that the manager maintains a position in the top 25 percent.  Using a 15-step criteria, the firm assess beyond performance, fees and risk and provide a report each quarter to their clients so that they can make the best decision for their employees’ plan.

5. Have an Investment Policy Statement

Last but not least, while currently not required, it is advised that a plan committee utilize an investment policy statement.  Nearly all plans with $5 million or more in assets have an investment policy statement in place, so why shouldn’t ones with less? No matter how large or small, an investment policy statement provides a company with a blueprint for its investment goals, outlines responsibilities, specifies who is a fiduciary and details prudent standards for selecting, monitoring and replacing managers.

A fiduciary should hire an advisor that sets their company’s investment guidelines, analyzes each step they take to maximize the financial investments and, most importantly, keep them on track with their goals over time.

Has reading this make you question your company’s fiduciary? Have you realized that you ARE a fiduciary? Perhaps you know you are, but didn’t realize the extent of your responsibilities, and need the right advisor to help you. Seek out a qualified financial advisor who has not just experience in 401(k) plans, but has a reputable track record—the risks are too large to ignore.


* Source: "Explaining Poorly Designed 401ks," January 2nd, 2005, Quote - Fred Barstein "Buying out the Blind Squirrel," March 8th, 2008, The Weekly Exchange Newsletter.

Note: Due to industry regulations, the advisor may not post additional reply comments. If you would like to contact the author, please email him at dan.romero@lpl.com


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. LPL Tracking #602008

Upvote (37)
Comments (11)   |  8 years, 2 months ago from Cowan Heights, CA