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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

Professional Independent Fiduciary Matthew Hutcheson joins me to discuss the effectiveness of the existing company retirement plan paradigm, common conflicts of interest in the 401k market, appropriate fee disclosure formats and an overview of Modern Portfolio Theory.

Listen here:  Talk 401k with Don Davidson

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Articles and resources mentioned in this episode:

- Hearing on fee disclosure before the United States Department of Labor

- Other papers and articles published by Matthew Hutcheson

Via Don Davidson

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One prudent fiduciary practice for all retirement plans it to routinely benchmark the plan against other options in the marketplace.  We offer a unique solution that we feel is a good benchmark to use.

Today we’re looking at ways to avoid being dragged into 401k litigation and review a recent lawsuit involving a company charged with failing to negotiate lower fees for their plan participants.

Also we’ll share recent thoughts from financial author and columnist Dan Solin and his argument on why 401k plans should offer participants the opportunity to invest in pre-allocated portfolios of low-cost stock and bond index funds

Listen here:  Talk 401k with Don Davidson

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Articles and resources mentioned in this episode:

- Essential, But Often Ignored, Principles of 401k Fiduciary Risk Management

- Author and Financial Columnist, Dan Solin

- Los Angeles Times article on the Edison International 401k lawsuit

Via Don Davidson

We’re proud to announce the launch of a new podcast specially for business owners, plan trustees and the individuals responsible for running a company’s 401k plan.

Enter Talk 401k with Don Davidson…. a weekly conversation focusing on 401k best practices and prudent fiduciary standards.

The first two episodes are currently available on iTunes so have a listen and send any thoughts or comments to don (at) manarin.com.

Episode 1 – Responsibility for Investment Selection; ERISA 3(21) & 3(38) investment fiduciaries; “Defined Benefit-ization” of Defined Contribution Plans

Guest:  Scott Pritchard, AIFA – Managing Director of Retirement Plan Consulting Service at Capital Directions

Summary:  Plan sponsors cannot eliminate their fiduciary liability but there are ways it can be managed and reduced – Partnering with an investment fiduciary can help reduce fiduciary liability as we cover the roles and responsibilities of an ERISA 3(21) investment advisor and 3(38) investment manager – Are there better alternatives to target-date/lifestyle mutual funds? – Plus much more

Episode 2 – Benchmarking your 401k; Plan Costs; Department of Labor Fee Disclosure Rules

Guest:  Tom Kmak – CEO of Fiduciary Benchmarks

Summary:  Benchmarking a company 401k plan involves much more than simply evaluating the cost – In today’s 401k space, plan sponsors must look at much more that presents the overall value the plan is delivering to participants – What do the Department of Labor’s recent fee disclosure rules mean for business owners and the retirement plans they offer?

Via Don Davidson

As the topic of fiduciary responsibility and fee transparency heats up in the 401k space, I thought it would be worth noting to address the characteristics of working with someone free of conflict vs someone with a bit more of a sales-oriented agenda.

So here they are. My telltale signs that you are working with a true 401k fiduciary:

1. They work for you the client and not just their employer. In my opinion, your 401k advisor should treat you as their most prized possession and not just another account where they earn a few extra commission dollars.

2. They deliver investment management and advice using a fiduciary standard of care and not just on suitability.  If your 401k advisor is part of a Registered Investment Advisor (RIA) then chances are good this is the case with your plan. Keep in mind that most financial salespeople working for a broker/dealer or insurance company by law cannot serve as a fiduciary to your 401k plan.

3. They are legally required to put your best interests first, avoid all conflicts of interest and offer full transparency of all plan costs and fees.

4.  They are able to serve as an ERISA 3(21) and/or 3(38) investment fiduciary and are willing to accept that responsibility in writing.   This relieves the plan sponsor and the individuals overseeing the plan from having to take responsibility for investment selection and monitoring.

5.  They do not accept commissions from the investment products in your plan but rather are compensated by an annual fee or fee for service.

You with me so far?

It’s pretty interesting (and slightly troubling) to me that while this all seems obvious, so few plan sponsors manage their 401k in such a way.

A short while ago I reached out to Chris Carosa who runs FiduciaryNews.com on Twitter and asked what business owners need to do better in order to address these issues head on.  His reply back to me is below:

So where does one start?  Here’s a simple action step you can take now:

- Create a spreadsheet that shows all costs involved with your plan including fees to the investment advisor and plan administrator.  Be sure to also include the expense ratios of the investment options in your plan and how they compare to industry averages.  Simply knowing what you are paying for your plan will go a long way towards improvement.

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Be sure to check out this list of helpful online resources for 401k sponsors offered by the Dept. of Labor and our new podcast, Talk 401k.

Via Don Davidson

A commonly-overlooked benefit of 401k investing is that contributions can be made pre-tax, so that even a small contribution can go a long way.  In this situation, 401k contributions are not taxed unitl you retire.  Therefore, the more you contribute to your retirement account, the smaller your taxable income becomes, and the more federal taxes you are able to defer.

The image presents the tax savings (reduction in tax liability) achieved by 401k contributions of $100 for six marginal tax rates.  For example, if you are subject to a 35% marginal tax rate and you choose not to contribute, you will pay $35 in taxes and only have $65 to invest in another account.  If, however, you invest pre-tax in your 401k, you will have $100 that is yours and can grow tax-deferred until you retire.

For additional help with 401k investing, visit us at Manarin.com.

Via Don Davidson

For most people, contributing for a company 401k plan or other pre-tax retirement account should be Step 1 when planning a financial future.  Yet it’s amazing to me the number of folks who mismanage their pretax investment options and waste a wonderful opportunity to potentially add hundreds of thousands of dollars to their wealth.

So here are 10 tips on how to be a successful at 401k investing:

1.  ENROLL & PARTICIPATE.  This is probably the most important step.  If you don’t start putting a slice of your paycheck in your plan, you will never be given the benefit it offers.  Think about it.  Outside a 401k or other pre-tax equivalent, most people have to earn at least $1.25 to invest $1.00.  For each dollar you invest in your 401k, your take home pay is reduced by only $0.75 (assuming a 25% tax bracket.)

2.  BE AN OWNER, NOT A LENDER.  The mutual funds in your 401k will likely invest in ownership positions (stocks, real estate, precious metals, etc.) or lending positions (bonds, money market accounts).  Conventional wisdom says that you have a mixture of both – a strategy I find absurd.  When you invest in lending positions you are guaranteed to lose buying power.  You will either lose it very slowly through inflation or possibly overnight if the dollar ever becomes worthless.  I recommend keeping your 401k assets fully invested in ownership positions which are not tied to the value of the dollar.  The volatility you will experience in 401k investing is a small price to pay for the long-term returns and the real world financial safety. 

3.  DIVERSIFY YOUR OWNERSHIP.  A diversified ownership portfolio will allow you to own shares of large, mid, and small company stocks.  Domestic and international stocks too.  As a hedge against inflation and geopolitical risk, I’d also keep a small chunk allocated to gold-related investments.  Your 401k may not offer all these asset classes so diversify as well as you can with the asset classes your are provided.

4.  DEMAND THAT YOUR PLAN OFFER THE HIGHEST QUALITY INVESTMENT OPTIONS.  I see the investment options offered in many plans and too often I come away unimpressed.  If your plan doesn’t give you enough asset classes to create a diversified portfolio or if all the options come with high fees and mediocre returns, ask the trustees of the plan to change this.  It’s likely their assets are also in the plan so you’ll be given credit for helping their bottom line as well as your own.

5.  LIMIT YOUR INVESTMENT IN COMPANY STOCK.  With 401k investing this is an easier lesson to swallow following the days of Enron and WorldCom.  So unless you enjoy the thrill of riverboat gambling, I don’t recommend having the bulk of your money tied to the performance of any one company.

6.  NEVER BORROW AGAINST YOUR 401K.  It will defeat the benefit that your plan offers and any loan repayments must be paid back with after-tax dollars. 

7.  DON’T CASH OUT YOUR 401K IF YOU LEAVE YOUR COMPANY.  If you leave a job you will likely have a right to your 401k assets by by taking them in cash means you will be hit with a tax bill and possibly a 10 percent penalty if you are not yet age 59 1/2. 

8.  IF YOU ARE AT LEAST 59 1/2, ROLL YOUR ASSETS INTO AN IRA.  Your 401k may not offer this feature but if it does, take advantage of it while you are still working.  This way you have access to the entire world of investments and not just the options offered in your plan.

9.  REBALANCE REGULARLY.  At least once a year, take a few minutes to rebalance the assets in your plan.  Sit down and calculate the current percentages of the mutual funds you own with your 401k investing.  Some percentages may be much higher and some much lower when compared to your initial allocation.  Many plan providers now allow your rebalancing to be done automatically on an annual, semi-annual, or quarterly basis. 

10.  COMMIT TO MAXING OUT YOUR PLAN.  I know not everybody can do this but as the very least, invest the maximum amount you can possibly afford.  Then every time your pay increases, up your contribution amount until you have hit the maximum allowed.  I promise you won’t be sorry.