The Free 401(k) and the Prohibited Transaction

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Regulation 408(b)2 regarding fee disclosure will end the free 401(k) for plan sponsors. Employees will be informed of what fees thet are paying and to whom. What questions will they ask when they realize their employer is paying anything for this benefit?

For many plans it is very common for the adviser to work one-on-one with participants and provide advice recommendations.  Let’s say that the adviser recommended an actively managed fund that pays revenue sharing, over an S&P 500 Index fund that does not.  While we all know there may be very valid reasons to do so, but ERISA is very clear that fiduciaries must act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.

By recommending a fund that pays revenue sharing over a fund that does not, that adviser (acting in a fiduciary capacity) has just influenced their own compensation, or their firms, thus creating a prohibited transaction.  Therefore, what started out as a qualified financial professional providing assistance to a plan participant, ended up in creating a prohibited transaction for the plan.

In my experience, most plan sponsors do not realize the risk they are putting themselves and their plan in by entering into such arrangements.   This is where you can help them understand the inner-workings of the plan services and fee arrangements to help them from inadvertently creating a prohibited transaction.

Many plan sponsors are unexpectedly allowing the adviser to their plan to commit a prohibited transaction. This can and should be avoided, not only to protect the plan sponsor but also to protect the participant.

Please comment or call to discuss how this affects you and your company.

  • Brokerages may have to change business practices: DOL (
  • ERISA §3(38) Fiduciaries and the Flavor of the Month (
  • The New 401(k) Advice Rule and the Road to a New Fiduciary Standard (
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