MassMutual joined Ameriprise and Fidelity as defendants of 401k lawsuits regarding their own company plan. What? The employees are claiming their employer put their business interests ahead of theirs with respect to their 401(k).
What 401k fiduciary risk?
Some 401k fiduciaries pick their advisors based on being a customer, relative or other personal or business reason. While this may be a good business reason, it is not a fiduciary reason. In this case, the responsible plan fiduciary needs to show that the fees being charged to the employees are low or the service is better than standard. Most casual brokers don’t have any specific retirement knowledge so the company is going to have to create the evidence file.
401k fiduciary risk vs. personal risk
Many 401k fiduciaries selected their personal broker as their plan’s broker. If they did well by me they certainly will do well by my employees they seem to think. While the broker likely has worked one-on-one with them and knows the names of their family members not so with the plan.
The 401k fiduciary rules say that the broker cannot give advice to the company (plan) or to the employees, even if their business card says they are a financial advisor. So much for the “they have done well by me” justification. Many brokerage firms understand the 401k fiduciary rules and now don’t allow their brokers to service plans (receive commissions). These firms know that there people have no expertise and could accidentally do something that would make them a fiduciary by their actions.
My partner handles the 401k fiduciary risk
Some business partners split functions. Often I hear that my business partner handles that, knows the rules or uses someone he has a longstanding relationship. Bernie Madoff had a long standing relationship with some of his investors (victims) too. If you aren’t a DOL Investigator or an attorney that specializes in ERISA, you can’t know the rules. Hoping they fit your interpretation is wishful thinking. I recommend that you have competent ERISA counsel review your documents so that you know what risks you bear.
Cutting out the middleman (401k broker)
Some fiduciaries choose to cut out the middleman altogether. The logic seems sound in that they are necessarily cutting out cost. Unfortunately, that logic doesn’t hold with 401k plans. One could have an investment manager, an investment advisor and the investments and have lower costs than just having the investments. In addition, going it alone means that you must stay self-educated on all of your responsibilities. Some fiduciaries mistakenly think that the brand name record keeper, often one with that sells investments, must take on the liability of the plan. Unless they are the rare discretionary trustee, they do not. That is what companies like ABB, John Deere and others have found out when they were sued.
What are the odds I’ll get caught (401k rules)?
Does it make sense to take risks you aren’t compensated for? The moral argument says why have a plan that favors your buddies more than your employees. The law says Employee Retirement Income Security Act not Buddy Income Security Act. While the fees of all service providers should be justified, the law does not preclude you from having a fiduciary advisor in addition to a broker. The broker can provide education support on say investments while your fiduciary advisor, can provide assist with compliance, monitoring investments and providers.
Ready for a 401k fidciary risk review?
The increasing action from Department of Labor investigations and class action lawsuits is showing that “set it and forget it” plan implementations are risky. We believe you are better off getting an assessment from an Accredited Investment Fiduciary, Qualified Plan Financial Consultant, ERISA Attorney, etc. qualified to help you assess where you stand.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.
