Major Decision! Choosing a 401k Service Provider or Plan Advisor

Choosing a 401k Service Provider or Plan AdvisorThis is Part 1 of a six part series on choosing a 401k plan advisor?

Why is choosing a 401k service provider and/or a 401k plan Advisor a major decision? Because unlike most day to day work-related decisions these are fiduciary decisions.

A fiduciary is anyone “exercising any authority or control regarding the management or disposition of plan assets…” ERISA §3(21)(A)   Fiduciary status is determined either by being named a fiduciary, or by virtue of the function or activities one carries out regarding the plan. Failing to fulfill one’s fiduciary responsibilities carries a personal liability.

Anyone responsible for, or having an influence upon, choosing a 401k service provider or advisor is a fiduciary. The Department of Labor mandates that a fiduciary must “engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided. . . such process should be designed to avoid self-dealing, conflicts of interest or other improper influence.”    DOL Field Assistance Bulletin 2002-3 (Nov. 5, 2002)

Self-dealing, conflicts of interest, and improper influence are very serious issues for fiduciaries and “following the money” is the primary method in avoiding these transgressions.  Many novice fiduciaries believe that understanding “what they are paying” is limited to the fees or hard-dollars they see. However, the Department of Labor expounds upon the money trail explicitly:

Fiduciaries have an obligation to “assure that the compensation paid directly or indirectly by [a plan to a service provider] is reasonable, taking into account the services provided to the plan as well as any other fees or compensation received by [the service provider] in connection with the investment of plan assets. The responsible plan fiduciaries therefore must obtain sufficient information regarding any fees or other compensation that [the service provider] receives with respect to the plans investments….to make an informed decision whether the [service providers] compensation for services is no more than reasonable.”  DOL – Frost (97-15A) and Aetna (97-16A)

A sad situation in the 401k market place has been the “Fiduciary Paradox.” The fiduciary paradox is the contradiction between plan sponsors being charged with the duty above (for which, if they fail, they can be held personally liable) and the fact that under ERISA, non-fiduciary 401k service providers have never been required to clearly disclose their compensation. Some believe that the amended Rule 408(b)(2) will eliminate this paradox, but the amended rule is so full of loopholes it has created even greater vulnerability for plan sponsors. A more detailed examination of this new paradox can be found at: Rule 408(b)(2): The New Fiduciary Paradox

The DOL recognizes the challenge of plan sponsors in fulfilling their fiduciary duties and has stated: “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert.”  DOL Reg. § 2509.95-1(c)(6)

The Courts have echoed this point: “…where the trustees lack the requisite knowledge, experience and expertise to make the necessary decisions with respect to investments, their fiduciary obligations require them to hire independent professional advisors.” Liss v. Smith, 991 F.Supp. 278, 297 (S.D.N.Y. 1998)

The challenge of identifying true independent professional advisors will be the topic of my next post.

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One response to “Major Decision! Choosing a 401k Service Provider or Plan Advisor”

  1. OK, Mark, you’ve now set the stage. I look forward to the next five parts of your exposition, and I’m making bets that you will be able to apply your somewhat unique perspective to the endeavor. My principal constructure criticism on Part I is that you did not weave the NEW definitional overlay created by 408(b)(2), the “Responsible Plan Fiduciary” (RPF); perhaps because of your budgeted space. Fred & Bruce published some good outputs on the RPF’s role, last year, but I do not believe that any writers/bloggers have properly intertwined the RFP’s role with the OTHER fiduciary roles….and the typical small-to-micro plan sponsor encompasses several. One example is a recent well-written article by Marcia Wagner, Esq in her article “Buyer Beware” published in ASPPA’s Plan Consultant’s Summer 2013 edition. I’ve thrown some mental stones, but otherwise appreciated her attempts at dissection of the 3(16) appointment issue. I also have a high opinion of Culbreth and Comer’s “Goldilocks and the Three Fiduciaries” article in Plan Consultant’s Spring 2013 edition, but have some departures to their good analysis. As you may know, I’m a fan of Chris Carosa, CTFA, and while I have written a sparkling review in Amazon for his “401(k) Fiduciary Solutions….et al” publication, I still find vapor trails in the RPF role vis-a-vis the other “more defined fiduciary responsibilities.” As previously noted, I’m no expert; I just read a lot and have the benefit of applying what I’ve learned since 1972 in this somewhat undistinguished field. But I am the first to admit that I have a lot to learn and that there are many, many experts out there to whom I cannot hold a candle.


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