Whose Side is Your 401k Provider On?

The regulatory environment for financial advisors is in flux.  Most significant among these changes is what standard of care advisors will adhere to when serving the public.  Advisors who are fiduciaries are legally and ethically obligated to do what is in their clients’ best interests.

Brokers, on the other hand, have no current legal obligation to do what is best for  their clients.  They are held to a lower standard which says their advice only has to be “suitable” for a particular client’s situation.

The difference between these two standards is immense and consequently brokers often find themselves in situations where a conflict of interest exists.  That, however, may soon change – at least as it relates to 401k plans.

The Department of Labor is considering a proposal that would expose conflicts of interest in retirement plans by requiring brokers to declare whether they are acting as fiduciaries.  In most cases, brokers are not required to act in a fiduciary capacity, so this will be an eye opener for companies with 401k plans.

An additional provision would require brokers to provide detailed overviews of their services and sources of compensation.  This disclosure may also come as a big surprise to plan sponsors.

Along with these new rules for brokers comes a higher standard for the plan sponsors themselves.  Sponsors who fail to perform their fiduciary obligation to employees will face severe consequences, including fines, lawsuits, and plan disqualifications.

If you are a 401k plan sponsor, here are some questions to ponder as we prepare for the new 401k fiduciary landscape: Do you have and follow a written Investment Policy Statement?  Have you had a service provider review and investment review within the past 12 months?  Do you have committee meetings and do you document the minutes?  Do you have a broad range of investment options selected based on prudent criteria?  Have you provided participants with certain required information as well as a list of optional information they can obtain by request?  How much are you paying for your plan and where is it disclosed in plain English?

If these changes come to pass, we think they’ll be an improvement.  Employers will know if their 401k provider’s incentives are truly aligned with their own and employees will rest easier knowing that their employer is being held accountable for properly managing the plan.

About the author

Woodward Advisors

2 Comments

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  • Unfortunately, you are most likely stuck using whatever brokerage firm your employer has contracted with to be the company’s 401k provider. Try not to let this one individual get you down about the whole plan. It’s possible you have decent options available on your investment menu. Look to create a simple portfolio out of index funds if you have those among your options.

    Also, check out the target date funds. Many plans have those as an option and they can be a good choice when you are just starting out. At a minimum, make sure you are contributing enough to the plan to capture your employer’s match – if you’re fortunate enough to have a match. And, if you (and your spouse if you’re married) aren’t already maxing out your IRA contributions, I’d do that as a next option after funding your 401ks up to the match. You can open an IRA at just about any fund company and have the entire universe of investment options available to you without having to deal with the turnip.

  • My employer currently offers a 401k plan. The broker we deal with has the personal skills of a turnip and have had little or no desire to deal with him or his firm in past years and have lrgley ignored my retirement account. Now in my early thirties I am seeing the need to pay more attention. Can I use a different brokerage than my employer uses or am I forced to deal with the turnip?

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