9 things advisors to 401(k) plans must do to keep clients out of hot water

A majority of the risks plan sponsors take with regard to their 401(k) plan can be assigned to professional fiduciaries. The hiring of an ERISA 3(38) investment manager transfers the risk and responsibility for the selection, monitoring and replacement of investment selections. The plan sponsor must annually meet with the investment manager to assure the direction is as intended. Other professional fiduciaries can nearly eliminate the risks and work associated with the plan. Business owners hire specilaists in other fields, legal, accounting, insurance, why not for your 401(k) plan?

Fiduciary Trust Building
Fiduciary Trust Building (Photo credit: ToastyKen)

Liable to be liable

Recent court decisions have identified issues that investment advisors need to consider to effect prudent plan management and to protect their 401(k) plan clients from significant fiduciary liability. Plan sponsors are at risk and and thus investment advisors need to insulate them from a new wave of ERISA lawsuits, regulatory oversight and legislation. See: How Schwab is gearing up its RIAs to fight for 401(k) assets.

Plan sponsors will likely call upon investment advisors with ERISA experienced with the ins and outs of the Employee Retirement Income Security Act of 1974 to manage plan operation and fiduciary compliance. Investment advisors will need to do more than perform fund due diligence and provide fund recommendations. The marketplace will offer ever-expanding fiduciary service models, thus challenging investment advisors to expand their service deliverables for their 401(k) plan clients.

Risky outsourcing

401(k) plan fiduciaries have been found to have breached their duties to plan participants and have been assessed significant damages for failing to monitor recordkeeping costs, negotiate rebates and prudently select and retain investment options. Many plan sponsors have relied upon non-fiduciary service providers for investment selection and fiduciary guidance in the absence of a fiduciary-overlay service or discretionary vendor.

Plan sponsor fiduciaries cannot rely upon a non-fiduciary service provider with a conflict of interest to accept responsibility for their service model and investment fund recommendations. Plan sponsors should become increasingly skeptical of non-fiduciary service providers’ managing plan assets and plan administration. Investment advisors need to educate plan fiduciaries who may not recognize a conflict of interest.

It is time for plan sponsors to realize that their service provider may have a conflict of interest when recommending products.

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Posted via email from Curated 401k Plan Content

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