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Do 401k Plan Sponsors Really Believe These Reasons To Hire A Professional Fiduciary?
by Christopher Carosa, October 1, 2024
With September ended, so ends another “Fiduciary Month.” And while ‘fiduciary’ can range from personal thousand-dollar trust plans to multibillion-dollar pension plans, perhaps now is the best time to reflect on what makes a professional fiduciary better and more attractive to 401k plan sponsors. It’s important to remember the role of an ERISA fiduciary differs from the traditional trust officer (who is also a fiduciary, for those not familiar with that business).
“At common law, a trustee was held to a prudent person standard, while ERISA holds fiduciaries to a prudent expert standard,” says Marcia Wagner of The Wagner Law Group in Boston. “To satisfy that higher standard, it is often necessary to engage a professional fiduciary.”
There is also a difference between “fiduciary” as it pertains to the plan sponsor and the professional service providers they hire. Indeed, that difference zeroes in on the primary benefit plan sponsors gain by hiring professional fiduciaries.
“Section 404(1)(1)(B) of ERISA outlines details around the Prudent Expert Act. In short, fiduciaries of a retirement plan are not judged as a prudent person, but rather an expert,” says Todd Feder, vice president and senior retirement plan consultant at Girard, a Univest Wealth Division in Souderton, Pennsylvania. “If they do not have the expertise to oversee and monitor investments, then hiring a fiduciary can help ensure they meet ERISA guidelines.”
In addition, plan sponsors themselves may not have true independence regarding their retirement plans.
“If corporate officers or managing members of an LLC are members of an investment committee, there will be circumstances in which they may face a conflict of interest,” says Wagner. “To avoid that conflict, appointment of an independent or professional fiduciary is an appropriate measure. Also, appointing an independent fiduciary can reduce a lay person’s fiduciary liability. While a person who appoints an independent fiduciary has the duty under ERISA prudently to select and monitor a professional fiduciary, even if the fiduciary function is completely outsourced to a professional fiduciary such as an investment manager under Section 3(38) of ERISA the monitoring responsibility is a lesser responsibility.”
Here’s the real conundrum faced by 401k plan sponsors: They realize they don’t have the expertise to administer the plan. So, what do they do? Well, when they don’t have the internal personnel to handle any other aspect of their business, they hire a third party. It’s only natural they do the same thing for their retirement plan. The trouble is, not all third parties are created equal. But does the average plan sponsor know this?
“Working with a professional fiduciary is the only way that a plan sponsor can truly outsource responsibility for their plan,” says Jeff Coons, chief risk officer at High Probability Advisors in Pittsford, New York. “Unless they have a 3(38) manager (for investments), a 3(16) administrator (for administration) and a 402a Named Fiduciary (for overall plan governance), their plan provider is simply assisting the plan sponsor to fulfill their responsibilities to the plan rather than delegating fiduciary responsibility for those activities to an industry professional responsible for their decisions.”
Of all the different flavors of ERISA fiduciary, the 3(38) variety seems to be the most talked about.
“A 3(38)-investment fiduciary can assume the majority of the risks associated with selecting, monitoring, and change investments in a 401k plan,” says Feder. “The investment fiduciary can leverage best practices related to menu design to ensure the investment line-up is designed with behavior finance best practices to improve the probability of success for participants.”
The bottom line is that rules and regulations have been developed to make the job of 401k plan sponsors easier and less risky.
“Professional fiduciaries protect plan sponsors,” says Brian Seelinger of Knox McLaughlin Gornall & Sennett, P.C. at Erie, Pennsylvania. “They understand what they are supposed to do for the sponsor and will also explain to the sponsor what risks the sponsor is retaining. The largest failing of non-professionals is that the sponsor believes they are doing the same job as the professional and this is not the case.”
Given this, what’s the best way to convince plan sponsors why they need to hire an ERISA fiduciary?
“You don’t hire an accountant to do CPA work or a Physician Assistant to do Surgery on your child,” says Terry Morgan, President of Ok401k in Oklahoma City, Oklahoma. “So, why hire an amateur who may have a conflict of interest, has proprietary investments to sell you, is commissioned-based, and cannot spell ERISA?”
In exchange for removing conflicts of interest, plan sponsors can return to their day jobs, comfortably delegating the operation of their plan to an independent third-party who is duty bound to work only in the best interests of the plan sponsor and the plan participants.
“The most important reason 401k plan sponsors should work with a professional fiduciary is to ensure that the plan is managed with the singular focus placed on the best interests of plan participants, which minimizes risks of non-compliance for the plan sponsor,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “A professional fiduciary provides expertise, transparency, and oversight, which can help avoid costly mistakes and protect the plan sponsor from potential legal liabilities. Ultimately, this fosters greater trust and security for both the sponsor and the plan’s participants and improved retirement outcomes for the participants.”
We all want to create better products, better services, and a better work environment. The company-sponsored retirement plan is part of that work environment.
“Hiring professional fiduciaries will typically lead to a better plan, because providers are now on the hook for delivering industry best practices rather than simply selling whatever product or service is on the shelf,” says Coons. “Every retirement plan provider is motivated by self-interest to some degree, but the self-interest of the provider and the plan are better aligned when that provider accepts fiduciary responsibility for their decisions.”
Now, if only 401k plan sponsors of all stripes will believe this.
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Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions.