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I run the 401k plan for my company and some of our employees occasionally ask for personal advice about how much to save or which funds to choose, am I allowed to give them advice?

I want to help people as much as I can, mostly because they are my friends, but I do get worried about what might happen if my advice does not work out well for then.

Jan 25, 2012 by Mel from Cambridge, MA in  |  Flag
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Melissa:

Your job is to run the plan, not give advice. As a company empolyee, if you give advice the company could be held responsible should your "advice" turn out to be in contradiction of what the goals of the employee are. I suggest that the only recomendation that you make to the employee is to consult a qualified, licensed advisor that they either have a relatioship with, or to interview and seek out a trusted advisor of their choice. They may to to www.fpa.org to find a Certified Financial Planner(tm) in their area. My Broker Dealer of 20+ years is in San Diego, and I am familiar with some very experienced planners in your area- give me a call and I can direct you.

Comment   |  Flag   |  Jan 26, 2012 from Suffern, NY

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Allan Henriques Level 18

It’s completely understandable that you’d want to help when friends or co-workers ask you for guidance. But when it comes to sharing investment or retirement planning advice, it’s best to proceed with caution. Your good intentions could expose you to greater personal liability.

You say that you’re responsible for running your company’s 401(k) plan. That likely means you’re a fiduciary. (A fiduciary exercises control over the plan, provides advice to the plan or its participants, or selects or supervises other plan fiduciaries.) As a fiduciary, you have a legal responsibility to act in the best interests of retirement plan participants – and you’re held to the Prudent Expert Standard.

So the short answer is if you are a Prudent Expert, helping your employees with their 401k investments probably doesn’t increase your liability exposure. However, if you’re not a Prudent Expert (and if you’re not sure if you’re an expert – you probably aren’t), you are going to be treated as if you were. If you provide imprudent advice (or if an employee says you did and he acted upon it), you could be leaving yourself open to increased personal liability for investment losses suffered by the employee.

Many people who “run the company 401k plan” share your concerns. An increasing number are limiting their personal fiduciary investment liability exposure by delegating the operational responsibility for investment decisions and investment advice to employees, to what ERISA calls an independent 3(38) Investment Manager. In many instances, this prudent expert fiduciary will be better able to offer informed, trustworthy advice.

If you want to learn more about meeting your fiduciary responsibility, you can check out the Department of Labor website: http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html

Comment   |  Flag   |  Jun 04, 2012 from Rocklin, CA

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George Cones, JD Level 20

It is terrific that you are concerned about your plan participants, not enough plan sponsors are. Your plan may be the only chance some of your employees have of having a decent standard of living in their retirement years.

While it is true that you should be cautious in giving personal advice, there are tools available that can help the plan fiduciaries provide their plan participants with the knowledge to make better choices.

A good 401(k) interface (where your participants log on to the 401(k) website) often has very good analytical tools that can can show expected return of the particpant's portfolio. The website may also have gap analysis tools to help the participant determine what they will need in retirement and how much they need to be saving each month over their working life.

Unfortunately, without training on these tools many participants find such analysis daunting, so you can lead a horse to water....

That is why it is important to have an outside expert, that could be a fee only advisor, or an outside benefits consultant, help you and your participants understand how your plan is working to achieve your plan’s and the participants’ goals.

You may want to consider talking to someone at a shop like Investment Horizons for some ideas (we have no affiliation with them) : www.investmenthorizons.com .

There is nothing wrong, in fact it would be prudent, to be sure that participants know how important saving for their retirement is, and to monitor participants’ investment choices. Your concern is commendable.

As Mr. Henriques mentioned you may want to find someone who is willing to sign on as a 3(38) fiduciary. Look at a few, and always check references.

Comment   |  Flag   |  Jun 05, 2012 from Wilmington, DE

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The plan obviously needs a financial advisor who you can send these folks to. Interview a few, try to find one that is an independent RIA( Registered Investment Advisor) , with no Broker-Dealer affiliation, that can serve as a FULL fiduciary. ( Or one who partners with a firm that can serve as a full fiduciary) In addition to financial advice, certain groups can guide you through the entire Fiduciary Process.. Some providers will also sign your 5500 and even represent you in an audit if necessary. It's a rapidily changing landscape, so be sure to seek out high level service and unbiased advice. Good luck.

Comment   |  Flag   |  Jun 05, 2012 from Port Washington, NY

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The above answers are fantastic. Here are a few more things to ponder.

You are a fiducairy to the plan. This means that you can give advice to participants, but you are then liable for the advice. A way to protect yourself to a large degree and yet still help your participants is to engage the help of a full 3(38) ERISA Investment Fiduciary. That group would be on the hook for their advice. In order to properly vet a 3(38) you need to do the following:

• Make sure they actually acknowledge and accept the 3(38) status. • Check to make sure they have insurance that includes ERISA Fiduciary acts. • Make sure they have a Fidelity Bond for your plan. • Keep reviewed copies of their Form ADV. • Keep copies of any designations or background that is relevant to their 3(38) services. • Show record of price negotiation and comparison. • Review their systems and any outcomes they can provide proof of. • Makes sure they have no conflicts-of-interest. ERISA Fiduciaries aren't allowed to have any.

There are many more issues you should consider in hiring a 3(38). These are just a few.

View all 4 Comments   |  Flag   |  Jul 09, 2012 from Austin, TX
Todd Kading, CFP®, ChFC®, RF™

Correct. George.

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Flag |  Jul 11, 2012 near Austin, TX
Courtenay Shipley

Right, right and the intent behind this 3(38) labeling business is the advisor is taking discretion over the investments in the plan, can make changes without having to consult anyone first, and is accepting the liability that goes with all that.

Flag |  Dec 10, 2013 near Alexandria, VA

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Luke Collova Level 8

Mel, There has been a lot of good advice here already so I am not going to repeat most of the thoughts but wanted to emphasize one thing. I used to insure Fiduciary Liability exposures for a global insurance company and I have seen many times what it looks like when things go bad for someone in your shoes. Typically when plan Fiduciaries have issues is when they do not provide good invest options to the participants. I agree with the others that you should not be the one giving specific advice to the participants - that is not part of your duty. But what is your duty is to ensure they have a good selection of investment vehicles to choose from. I understand that the participants are your friends but make sure you wear your plan fiduciary hat separately from your friend hat. By making sure that you have given them good investment options in the plan you are indeed helping your friends. But I would absolutely leave the actual allocation decisions to the participants and urge them to work with an advisor that they trust. In conclusion, be a good fiduciary to the plan and let an investment advisor be a good fiduciary to the specific participants and their individual unique financial situations. Best, Luke

Comment   |  Flag   |  Dec 05, 2013 from Seattle, WA

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I wouldn't do it. It looks bad (a la fox-watching-henhouse) and someone could sue you if they misconstrue what you said down the road or only follow part of your advice. Blanket statements like, "save as much as you can afford" or "the plan offers a menu to choose from or they have some 'invest-for-me' options" are fine, but best to say "I'll put you in touch with someone who can help" or "have you checked out the tools on the website that can help you with this."

Comment   |  Flag   |  Dec 10, 2013 from Alexandria, VA

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