As a 401(k) fiduciary (ERISA fiduciary) aka plan sponsor, your day job (CEO, CFO, HR) is increasing your firm’s bottom line. It is not learning the ins and outs of the laws for the Employee Retirement Income security Act (ERISA) that govern retirement plans. However, the Prudent investor Rule requires a fiduciary to invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust [and] and in satisfying this standards, [to] exercise reasonable care, skill and caution.”
Who’s got time for that? As a rational person, if you had time, you would learn the laws that govern the 401k you are liable for running. You may even become an Accredited Investment Fiduciary. You would smell out conflicts of interest like the one that exists if you hire a client of your firm to be your plan’s advisor. It is clear to see why that is in your company’s interest to do so. But is it in your employee’s? If you don’t pay all the fees, such as the cost of the investments, you have a financial risk as this conflict is expressly prohibited. Companies have experienced multi-million dollar judgments when they chose to pass on fees to their employees that they could not show benefitted the employee (Google 401k fee lawsuits)
As a human, a 401(k) fiduciary AKA President, Managing Partner, CFO and VP HR, takes the path of expedience. Pick a name brand investment firm or advisor from a well-known financial company and assume that they know what they’re doing and move on. As both a fiduciary and a participant of the plan, I have not found someone that could decipher the various types of fees disclosed in both their company and participant disclosures.
While you may have heard something about monitoring, you likely believe that should be included in what your employees are paying your broker for. However, it may not be in the interest of the broker to reduce your fees. If we are like everyone else, should that anonymity be safe? You would have an independent reports on your providers, investments and plan that help you prove to your employees that you are looking out for their best interest.
As a rational participant, what is your personal retirement plan?
- Do you know how much you need to save per paycheck,
- How many years?
- What rate of return to reach your retirement income need?
This gets more complicated if one factors in inflation, health care and long term care considerations. Does this mean that the fiduciary as a participant is not rational? I find that just like the employees you watch out for, you have not had the time to either to become retirement experts or find a specialized advisor to help you calculate. Pre-401k companies sought out actuaries who would do the calculations and work with an implementation team to make the necessary annual adjustments to savings and investments.
The media, 401k research firm, BrightScope.com, and the ERISA cops, the Department of Labor and IRS, don’t care much about fiduciaries as humans. They see you as rational person that knows the 401k laws and compliance.
I believe you need to get a plan/provider review by either an attorney ERISA expertise or an advisor that is willing to share in your liability. It wouldn’t hurt to get your ERISA attorney to read the advisor’s contract too.
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