Does your company have a 401(k)? Are you the Plan Sponsor? If you answered “yes” to both of these questions, I have one more for you: are you aware of the fiduciary role you are assuming? As a business owner and a 401(k) Plan Sponsor, you have a responsibility to select a high-quality investment advisor for your plan. Unfortunately, many business owners are too busy running their business or dealing with other benefits plans to pay as much attention as they should to their retirement plans.
It is a fact that the Department of Labor (DOL) has intensely ramped up its oversight of 401(k) plans, as well as the number of auditors on staff to enforce this oversight. There has never been a better time to give yourself and your 401(k) plan a “fiduciary gut check.” Remember: as a fiduciary to the plan you are personally liable for any fines brought against you in a DOL audit. In case you are selected to be audited by the DOL, you want to make sure your 401(k) is in good shape. Here are three questions to ask your investment advisor to get you started on the right track:
1. Where is the Service Agreement?
This is one of the first questions you would be asked if you were to be audited by the DOL. There should be three copies of your Service Agreement available. One should be kept by your record keeper, a second copy should be kept by your investment advisor and you should have one as well. If your advisor can’t readily produce this document for you, you may want to reassess whether you want to continue working with him/her. The Service Agreement is a required written disclosure containing:
- A description of the services to be provided.
- Documentation of direct and indirect compensation to be received (a separate cost disclosure of recordkeeping services if multiple or bundled services are provided).
- Disclosure as to whether they are providing fiduciary services.
- Information about plan investments and options.
2. Do you function as a plan fiduciary?
Many 401(k) plan advisors do not function as fiduciaries. So if the DOL were to audit you, all of the liability would fall on you as plan sponsor, not your advisor. Because of increased litigation and regulation, plan sponsors are seeking to minimize or shift fiduciary responsibility and liability to qualified third parties, such as an investment advisor. After all, if you are paying them to help give advice, shouldn’t they have some skin in the game and take on the liability with you? Some advisors who work for broker-dealers or insurance companies will sell you a bundled plan and may tell you they cannot advise you on which funds to pick. Essentially, you’d be paying a myriad of fees and getting no advice.
I’ll let you in on a little secret that broker-dealers don’t like sharing: in order to provide investment advice, an advisor must function as a fiduciary. Fiduciaries take on a much higher level of responsibility, and most advisors (and large broker-dealers) are unwilling to accept the potential liability that comes with acting as a fiduciary. So the cat is out of the bag, go ahead and ask your advisor if they are acting as a fiduciary; better yet, have them put it in writing! You need someone who will serve as a partner with you on the plan, someone who can offer advice on investments and consult with you on a wide range of issues. It’s in your best interests to work with an investment advisor who is also a fiduciary. Since Twelve Points Wealth Management is an RIA, we are also a fiduciary.
3. What are the total fees you receive from our plan?
With 401(k) plans, it’s easy to end up paying your advisor an extravagant fee and not even know it. There are so many layers of fees that you need to peel each one back to figure out what you are actually paying. If your advisor can’t, or won’t, answer the question “What exactly am I paying for?” that should be a red flag. This should be a very simple question to answer. Advisors charge an advisory fee, which should range from about 0.25% to 1.00% depending on the amount of assets in the plan. Some even charge a flat fee, e.g., $500. This should all be outlined in your Service Agreement with your advisor. Advisors who are not as transparent about what they are charging may be receiving a 12b-1 fee, which could shift 0.25% or more every year from your account balance into the advisor’s pocket. Other types of investment vehicles, such as variable annuities and collective investment funds, may charge additional fees as well.
As the Department of Labor continues to crack down on Plan Sponsors, you owe it to yourself and your company to do a “fiduciary gut check.” If for no other reason, wouldn’t you want to know you were in good shape in case you were selected for an audit?