Safe Harbor Investment Advisors, LLC

The F-Word

I hate the “F” word. You know the one I am talking about – Fiduciary. 

401(k) salespeople love to talk “fiduciary responsibility” – the only problem is that most of them have none. If you are a business owner with a 401(k) plan, fight back with a few pointed questions.

  1. Who is the named fiduciary? 
    For most small 401(k) plans the named fiduciary (sometimes referred to as the “Plan Sponsor” or “Administrator”) is the business owner or CFO whose name is actually listed in the plan documents. You won’t find the names of that 401(k) salesperson, accountant, or Third Party Administrator in the plan document. The buck stops with that owner and s/he can never completely delegate away that responsibility.
  2. Are you regulated under the Investment Advisers Act of 1940? 
    401(k) advisers come in two distinct flavors – Registered Investment Advisers (RIA’s) are regulated under the act and are always considered fiduciaries that have to put the clients’ interests first. Registered Reps, insurance agents, and brokers (which follow the less stringent “suitability standard”) are not.
  3. “Do you have complete discretion over plan investments?”
    If the business owner/named fiduciary can ultimately take or leave the investment advisers recommendations, then the real liability for those investment choices still rests with that business owner.

Here are a few people most of us would mistakenly think of as fiduciaries:

  • The Adviser: Again, unless they are a Registered Investment Adviser (RIA) they will wash their hands of responsibility when things go wrong.
  • Third-Party Administrator (TPA) or Record-Keeper: We all depend heavily on these people to handle the red tape, but they are not plan fiduciaries. For example, they prepare IRS Form 5500 for you, “signature-ready.” But guess whose signature goes on it? Hint: It’s not the TPA’s.
  • The Trustee: Unless they have complete discretion over the plan, that trustee (usually the insurance or Mutual Fund Company) is a “directed trustee”. Guess who “directs” them and is still liable? Yup, you guessed it: The business owner.

Other Gimmicks:

  • Fiduciary Warranty: Read the fine print. The warranty only says that you will be given a diversified (meaning one stock, bond and cash fund) investment menu. That is only one narrow slice of the fiduciary pie. The majority of 401(k) lawsuits involve excessive fund costs and this is not covered in the warranty.
  • Co-Fiduciary Status: I like the sound of this but it is not well defined in ERISA law, so everyone seems free to interpret its meaning differently. No real protection here.

So what can a plan sponsor do? 

First, keep your risks in perspective. How many business owners who sponsor a 401(k) plan and oversee it in good faith, have actually been sued and lost? My guess is that given the number of plans out there it would be statistical noise. Want proof? Look at the cost of “fiduciary insurance” – it’s cheap for a reason.

Finally, hire a knowledgeable Registered Investment Adviser (RIA) who specializes in retirement plans and work with them implement a few reasonable precautions.

The F-word does not have to be a dirty word anymore!

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