Is Your Company’s 401(k) Plan Truly Looking Out for Employees?

November 26, 2019

As a responsible employer, you want the best for your team members and your company. In today’s competitive job market, it’s important to offer your employees an effective 401(k) plan that will help them achieve financial success in retirement as well as improve their overall financial wellness in their working years.

The nature of and choices among 401(k) plans has evolved over time. Today, plan sponsors are able to offer a 401(k) plan that is significantly more transparent, participant-directed, user-friendly, cost conscious, and participant-outcomes focused.

The best resource a plan sponsor can enlist to make sure that the employees’ interests are protected and the staff administering the plan are properly supported is an experienced 401(k) investment advisor.  An effective advisor serves as the plan’s quarterback, proactively supporting the sponsor and collaborating with the other team members (recordkeeper and administrator) while providing ongoing education and guidance to participants.

What to Look for In a 401(k) Advisor

When interviewing advisors for your company’s 401(k) plan, be sure to ask these two questions:

  1. Do you serve as a fiduciary to the plan?

A fiduciary is someone who places the participants’ best interests first, does not receive commissions or incentives that could divide his/her loyalties, and who meets the highest standard of care in performing investment duties (the prudent expert standard).  In 401(k) plans there are two types of fiduciaries, a Section 3(38) fiduciary and a Section 3(21) fiduciary.  A 3(38) advisor is the highest level of fiduciary, assuming full responsibility for selecting, monitoring, and replacing the plan’s investment options (removing that responsibility from the sponsor’s shoulders).  A 3(38) advisor typically indemnifies the plan sponsor from liability relating to the plan’s investments.  A 3(21) advisor serves only as a co-fiduciary to the plan sponsor.  A 3(21) advisor may recommend investment options to the plan sponsor, but the plan sponsor retains ultimate responsibility and liability for selecting the investments.

  1. Is 401(k) advisory service a core part of your business?

The rules, regulations, and intricacies of effective 401(k) plan administration and governance are complex.  You want an advisor who has deep expertise and experience in managing 401(k) investments, understands the choices and consequences of plan design, knows how to communicate with and educate participants effectively, is able to provide competent guidance to the sponsor with respect to plan governance, and capably organizes and coordinates with the plan’s recordkeeper and administrator.  This level of expertise and experience is only found in advisors for whom 401(k) plans are a core part of their business.

What to Expect from a Competent Section 3(38) 401(k) Fiduciary Advisor

  1. A Best-in-Class Fund Line-up

An experienced fiduciary 401(k) advisor will offer participants a fund line-up selected from an open universe of investment options (ie., not limited to proprietary fund families), following a rigorous process of due diligence in manager selection and monitoring.  The fund line-up will offer best-in-class managers—both active and passive—across all major asset categories. The fund’s expense ratios will be reasonable, competitive, and focused on the value delivered by the manager.  The advisor will be fully responsible for benchmarking and monitoring the fund line-up, replacing any funds when prudent.

  1. Balanced Portfolios

Most participants do not know how to construct appropriately allocated, diversified investment portfolios from the underlying fund line-up.  An effective fiduciary advisor will solve that problem by offering a range of balanced portfolios from which participants can choose.  A balanced portfolio is one that allocates appropriately between stocks and bonds relative to a participant’s time horizon and/ or personal risk tolerance.  You should expect your fiduciary advisor to offer several types of balanced portfolios, including target date portfolios, risk-based balanced portfolios, and asset allocation model portfolios constructed from the underlying fund line-up.

  1. Participant Education and Guidance

An effective fiduciary 401(k) advisor will provide participants ongoing hands-on financial education as well as instruction on how to utilize the planning and financial wellness tools and resources available on the plan administrator’s web site.  The education program should teach participants the importance of saving for retirement and how to plan and invest for retirement so that participants are empowered to make good financial decisions for themselves.  An effective advisor will also be available to all participants by phone, email, and after group education meetings to provide one-on-one guidance in selecting balanced portfolios that are appropriate for their time horizon and personal risk tolerance.

A core part of The Fiduciary Group’s service is serving as a Section 3(38) fiduciary advisor for 401(k) plans.  You can expect from our 401(k) team a line-up of best-in-class investment options, effective participant education and one-on-one guidance, and experienced support and advice for plan sponsors.  Our goal is to help employers look out for the best interests of their employees when it comes to their 401(k) plan.

Interested in working with The Fiduciary Group’s 401(k) investment management and advisory team? Please reach out to us to get started.

AUTHOR:

JULIA BUTLER, CFP®, JD, MBA, CFEI