A fiduciary is an individual or group responsible for administering, managing and making decisions about a 401(k) plan and as such, they have an extremely responsible role as their decisions can impact the retirement plans for their employees.
While this title and role seem a little bit old fashioned, the importance of understanding what a fiduciary does, perhaps matters even more than ever.
Fiduciaries have some specific roles and responsibilities as laid out in the Employee Retirement Income Security Act (ERISA). Some of these responsibilities could be as simple as notifying plan employees of any changes to the plan, including changes from one provider to another, whereas others could be significantly more complex. A key requirement however is that they are bound by law, to focus on your good above anyone else – including their own – and they are legally obligated to advise of any conflict of interest that might impact this.
Being A Fiduciary Requires You to:
- – Act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- – Carry out their duties prudently;
- – Follow the plan documents (unless inconsistent with ERISA);
- – Diversifying plan investments; and
- – Paying only reasonable plan expenses.
How does this work in practice?
Simply put if you are dealing with an investment professional that is not bound to a fiduciary standard, they can suggest investments that while meeting your goals might end up costing you more in fees and commissions in the longer term. The new Fiduciary Rule introduced by President Obama prior to his term ending would require that any registered investment professional dealing with a retirement type of account become a Fiduciary. An advisor bound to the standard is legally bound not only to disclose the differences to you but is in fact obligated to look for the deal that benefits you the most, regardless of the personal benefit.
Are all financial planners fiduciaries?
No, they are not. It is actually your responsibility to find out if your advisor is also a fiduciary and to question and understand the fees you will pay for any particular investment. While most financial planner’s and all fiduciaries are obligated to seek investments that will best meet your needs and requirements, that does not obviate you from the responsibility of knowing and understanding how your own money is being spent.
I now realize that I am a Fiduciary to my retirement plan – What should I do next?
In general, lower fees are better, but fees need to be put into the context of services being provided. The law specifically states that all fees charged to a plan be “reasonable” however this determination can vary from plan to plan with some providers bundling multiple services in a single fee. Many say the best offense is a good defense. You need to make sure you document your review process of your retirement plan. You should be able to explain and demonstrate that your plan offering is competitive relative to the services and investments offered to help to further reduce liability. Benchmarking your retirement plan is the first step in this process.