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Expert Insights for Smart Financial Planning

5 Fiduciary Questions 401(k) Advisers Need To Answer

The new broker rule is bound to worry plan sponsors. Be ready.


With high-profile 401(k) litigation making headlines, many plan sponsors, if they haven't already, will likely turn up the heat on their advisers by asking very pointed questions. Advisers should be prepared to respond. Here are the likely questions they'll receive from the sponsors with whom they work:

See Also: 8 Things You Must Know About the New Broker Rule

1. Should I Be Worried?

The responsibilities and risks 401(k) plan sponsors face are clearly daunting. Of course, those posing this question are likely the ones with the least to worry about. It's at least recognition that compliance with the myriad regulatory requirements is not something to take for granted.

Employers blissfully unaware of the magnitude of their fiduciary duty, basking in the glow of their altruism for providing what they assume to be a meaningful retirement benefit, could unwittingly be exposed to the no-good-deed-goes-unpunished paradox.

Plan sponsors should be reminded that they are always required to act solely in the best interests of the plan participants, act in a prudent manner, diversify the plan's investments and ensure that the plan expenses are reasonable.


As the Supreme Court has made clear, it's not just a matter of crafting a broad, well-diversified fund line up. That's merely the price of admission. The responsibility then becomes ongoing monitoring to ensure plan investments continue to meet the requirements of the company's investment policy statement.

Similarly, it's not enough to just document plan parameters that meet IRS and ERISA standards. Sponsors must then fastidiously adhere to those terms while addressing legislative and regulatory changes as they occur.

2. Do You Have My Back?

Plan sponsors will want to know whether their adviser has any skin in the game, so to speak. Is the adviser sharing in the risks alongside the plan sponsor as a co-fiduciary? And if not, why not?

Corporate executives who have been given the dubious honor of being chosen to serve as fiduciary to oversee their company's retirement plan often have no particular proclivity nor any special skill set to meet the challenge. Yet missteps can carry dire consequences, for both the company and the individual personally.


The idea of a professional fiduciary that can alleviate some of the liability while also ensuring a tightly run plan has great appeal, to say the least. But plan sponsors should ensure that the specific parameters of this shared fiduciary liability are clearly understood and specifically defined in the plan document.

3. How Can You Protect Me?

Getting down to brass tacks, the three primary factors upon which a 401(k) plan will be judged are the quality of the investments options, the legitimacy of the fees and the effectiveness of the participant education and enrollment process. Advisers can offer a number of specific recommendations in each of these areas to protect the plan and the sponsor, but each one requires an ongoing commitment.

Plan benchmarking should be conducted regularly to assess the competitiveness of fees, investment performance and plan design. An investment policy statement should be created initially to outline plan objectives and investment parameters and then be revisited frequently. At least annually, the company retirement committee and plan fiduciaries should meet to assess and review the plan. And with all these activities, always maintain complete and accurate records—the best defense against any challenge to the plan will be detailed documentation of the actions and decisions of the plan sponsor.

The employee education and enrollment process is one of the greatest opportunities to heighten the success of the plan. When employees don't understand the plan, many will opt out while others may be quite vocal about their dissatisfaction, sometimes in a way that can draw unwanted attention from regulators and even snowball into litigation.


4. Is It Worth The Risk?

The short answer is yes. While 401(k) plans are not without their challenges, they remain a vital source of retirement savings for most Americans and one of the key benefits that employers can offer to attract and retain talent. But it's only worth the risk if the plan is met with active participation from employees and it truly heightens their retirement readiness.

Sponsors will want to know how well employees are tracking toward their retirement goals. With data that a capable record keeper can easily supply, the adviser should be able to provide the sponsor with gap analysis reports to project the retirement readiness of the employee base.

As already discussed, proactive employee education efforts are key to drawing as many employees as possible into the plan. Thereafter, advisers should encourage sponsors to implement as many automatic plan features as possible. Industry studies have shown that participation rates increase dramatically through automatic systems for enrollment and escalating deferral percentages.

5. What's In It For Me?

Since political correctness is on the outs of late, maybe it's okay to throw caution to the wind and ask the thing you're not supposed to say out loud. What's in it for the business owners and other company executives?


Nowhere do the regulations suggest that 401(k) plans should only benefit the rank and file. The rules are, however, very specific in their intention to ensure that the tax advantages are not stacked in favor of the highly compensated as compared to lower paid workers.

Although it's easy enough to design the plan in accordance with safe harbor matching formulas that protect the contributions of the highly compensated, many plans don't. A surprising number of plans each year find that they have failed the IRS discrimination tests. In some cases, this has meant refunding contributions back to employees as taxable income and even loss of a plan's tax qualified status.

The Bottom Line

If plan sponsors are not asking these questions, it's only a matter of time before they realize they should. A great many have already come to the conclusion that the responsibilities are too great to shoulder alone. And they will seek out an adviser who can, and will, help mitigate those risks.

See Also: What the Government's New Financial-Adviser Rule Means to You

Jim Betzig is a partner and CEO of Beirne Wealth Consulting, a SEC Registered Investment Adviser with $2.5 billion in assets under management. Betzig's firm offers a service for advisers to outsource their retirement plans and institutional business if they do not want to do it themselves. He is also a co-author of the book The Rest Easy Retirement Plan.

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This article was written by and presents the views of our contributing expert, not the Kiplinger editorial staff.