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How are you managing your fiduciary liability?
The biggest responsibility 401k plan sponsors have is to offer plan participants access to full investment diversification.
Here’s the simple truth: By selecting and monitoring the investment options to create a diversified plan, a plan sponsor – that’s you the business owner or trustee – is establishing themselves as a fiduciary.
“But Don,” you say. ”I don’t do any of that. My investment provider handles everything so I don’t have anything to worry about. My fiduciary liability is fine.”
This is incorrect.
Many business owners who sponsor 401k plans hold onto the belief that by hiring a financial advisor, broker, or insurance agent to select and monitor investments, they have relieved themselves of their fiduciary obligation to their plan.
This is not the case and it causes many business owners to be unaware of the litigation risk they’re incurring.
The evidence to all this is stated in a plan’s service agreements. There you will find that most investment providers are there to assist or help the plan sponsor select the investments in the plan; and not to make the investment selection decisions.
So that becomes the key fiduciary responsibility a plan sponsor has when offering a 401k plan.
Now tie that to ERISA. If a sponsor doesn’t have the required expertise to make those investment decisions, they are required to go out and hire that expertise. And this is where many plans fall short.
Look at many 401k plan committees. They are staffed by people who are very knowledgeable in the industry they work but they’re not investment experts.
The only way for a plan sponsor to remove the fiduciary obligation of investment selection and monitoring is by hiring a qualified professional, such as an ERISA 3(38) investment manager, who acknowledges in writing that they are taking on that fiduciary responsibility, and who then takes full discretion of those duties within the 401k plan.
Only now does the plan sponsor no longer have the fiduciary responsibility, and the inherent liability, for making the investment selection decisions.
A lot of providers are out there waving the fiduciary flag. “Oh, you want a fiduciary? We’ll be a fiduciary for you.”
Before you decide on that provider, make sure you first understand what that means.
Written by Don Davidson