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Risk Management: Your Client’s 401(k) Plan and the F-Word

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Like everything else in business, a 401(k) plan comes with risk and reward for our clients. The rewards of a successful 401(k) can be abundant: employee recruitment and retention, and ultimately an avenue for a confident retirement. However, in order to reap these rewards their plan must be carefully designed, employees need to be engaged and educated, and the investments must perform, all while complying with ERISA and the IRC.

The Employee Retirement Income Security Act was signed by President Ford in 1974 and defined a fiduciary under common practices at the time. Practices have changed, but the definition has not. The industry has been training around fiduciary language for many years.  We all know it because we’ve all been to that training. Fiduciary is an “F” word. “Don’t’ be a fiduciary” is what we’ve learned.

Because of our industry behavior, the Department of Labor, since at least the Bush administration, has been seeking to create clarity on who is a fiduciary to a plan and when that occurs. This is not some new idea promulgated by the current administration. We have to remember that it is our clients’ and their employees’ interests, not the industry’s convenience, that should drive the fiduciary discussion.  When any of us delivers investment advice to our clients, even when skillfully implied as “ideas some of our clients have used,” the client reasonably believes we are delivering advice. After all, we use the title Investment Advisor, don’t we?

Clients generally aren’t the experts, but let’s get clear on what sponsors really think we are doing. The annual DC Survey of 5,900 plan sponsors nationwide published in 2013 by found that 65% of those plans used advisors that were not a qualified retirement plan investment fiduciary. Not surprisingly, 41% of the plan sponsors did not know to ask whether their advisor is a fiduciary.  Yet, the majority of clients said the advisor delivered analysis on investments, and almost half of them said the advisor gave individual participant investment advice.

According to the Ann Schleck & Co Fee Benchmarker, in 2012 the median advisor revenue for a $1 million retirement plan was $5,000 or .5%, and a $5 million retirement plan was $12,500 or .25%. Clearly, plans are paying advisors a similar amount whether the advisor is a credentialed retirement plan investment fiduciary or not. How much of that annual fee is going to pay for a relationship rather than for business risk management?  Putting these two surveys together, plan sponsors are often not aware what this expense should be buying. Continuing to argue that we are merely providing non-fiduciary education and that is worth many thousands of dollars is a disservice to all involved.

As for the client, why would a business executive not demand the most elemental liability protection for their retirement plan? Companies hire CPAs, not bookkeepers, to file their taxes. They hire attorneys, not life coaches, to manage their legal affairs. We as an industry seem to be arguing that they should not do the same when it comes to their retirement plan.  They purchase liability insurance in case someone trips on their way in to the workplace. A qualified retirement plan advisor acting as a fiduciary to a plan is an effective way to help a client manage and navigate the many regulatory risks that come with their 401(k) plan. My questions: why aren’t we all on board with that, and why aren’t we proactively educating our clients? You may say not your job or your BD won’t let you.  Talk to an ERISA attorney; it is a greater risk to act as a fiduciary when not acknowledging that role than to accept the role openly.

OK, I’ve been the 100% commissioned non-fiduciary 401(k) guy, years ago. After attending many 401(k) plan conferences, I came to understand that the right thing to do was also not that hard, and that was to become an acknowledged fiduciary.  If you are serious about being in the retirement plans business, get serious.  Just start with the following list:

  1. Work to build more than 50% of your assets under management in retirement plans or partner with someone who does.
  2. Acquire an Accredited Investment Fiduciary (AIF®) or similar designation.
  3. Get a retirement plans designation from ASPPA or the American College.
  4. Align with a registered investment advisor (RIA).
  5. Deliver services under a fee agreement that clearly states the services you will provide and the cost for those services.
  6. Put your fiduciary status in writing in your service agreement.
  7. THEN, deliver investment advice.

Finally, if you are not with an organization that will support these steps, it is not hard to find one that will support you to do the right thing for your clients.  That is the bottom line, do the right thing.

Other resources include, BrightScope and

Bill Heestand, AIF, is the chief perspective, creativity and integrity officer at Heestand Co., a Portland, Ore.-based retirement services and fiduciary advisor at Heestand Co.