Introduction

Plan sponsors sometimes ask whether or not they need a financial advisor for their 401(k). 401(k) advisors may seem unnecessary to some organizations, while others have expressed that their advisor has provided tremendous value. Should you hire or keep a financial advisor on your 401(k) plan? Here are a few considerations.

To understand the value of an advisor, let's start by understanding plan fiduciary roles in a plan. To simplify this, let's discuss three types of fiduciaries in a retirement plan. There are others, but these are a few vital 401(k) plan roles. We are not going to go in-depth on these responsibilities in this post.

3(16) Fiduciary or Plan Administrator

The term "3(16)" refers to Section 3(16) of ERISA, which outlines the responsibilities and functions of a plan administrator. A 3(16) fiduciary is an entity or individual appointed by the plan sponsor or employer to assume specific administrative responsibilities and fiduciary duties related to the operation of an employee benefit plan, such as a retirement plan. The primary role of a 3(16) fiduciary is to serve as the plan administrator, taking on critical administrative functions and related fiduciary responsibilities.

Some organizations hire third-party providers to provide 3(16) fiduciary responsibilities. When hiring such third-party providers, remember that sometimes these providers offer 3(16) services but don't take on the 3(16) role. 

3(38) Investment Fiduciary

A 3(38) fiduciary is an entity or individual appointed by the plan sponsor or employer to assume the responsibility of selecting, monitoring, and managing the investment options available in a retirement plan, such as a 401(k)s. The key distinction of a 3(38) fiduciary is that they have complete discretion and authority over the plan's investment decisions.

Some 401(k) financial advisors can be a 3(18) Fiduciary, but many don't. Often, 401(k) advisors will take on the role of a 3(21) fiduciary, where they share the investment selection responsibilities with the plan sponsor. Though this responsibility can be assigned to a third-party provider, someone must take responsibility for choosing and monitoring this service provider.

If you decide to take on this responsibility, you must consider your knowledge, experience, and the liabilities assumed by taking on this position. 

402(a) Fiduciary or "Named Fiduciary."

Under ERISA, a named fiduciary is an individual or entity designated in the plan document to have authority and responsibility for the administration and management of the retirement plan. The named fiduciary is typically responsible for making decisions regarding the plan's operation, selecting and monitoring service providers, and acting in the best interests of the plan participants and beneficiaries.

Some plans utilize third-party providers to help with their fiduciary responsibilities. Sometimes employers assume they have outsourced all fiduciary duties and don't realize the Named Fiduciary responsibilities remain on their shoulders.

How Do Regulatory Bodies View Your Fiduciary Responsibilities?

Here’s what the Department of Labor and the IRS say about fiduciary responsibilities.

The Department of Labor

"The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses...Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan..." (Department of Labor, n.d.)

The IRS

The IRS indicates that fiduciary responsibilities include "carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with the matters. The responsibility to be prudent covers a wide range of functions needed to operate a plan... Since you must carry out these functions in the same manner as a prudent person, it may be in your best interest to consult experts in such fields as investments and accounting." (IRS, 2023)

How a 401(k) Advisor Can Help

Now that we have gone over the importance of fulfilling fiduciary responsibilities let's discuss the services a financial advisor can bring to help you fulfill these duties.

Knowledge and Experience

Assess your understanding of investment principles, retirement planning, and the intricacies of your 401(k) plan. An advisor can be beneficial if you lack expertise or prefer professional guidance. If you are unsure about your knowledge of 401(k), don't assume the 401(k) responsibilities will fall on the shoulders of the other service providers.

Remember, if you are looking for a knowledgeable and experienced advisor, consider hiring an advisor focusing on 401(k) plans. Financial advisors have varying levels of experience with retirement plans. Just because an advisor is licensed to offer a service doesn't ensure they are experienced.  

Time and Availability

Managing investments, learning about retirement plan design, and understanding administrative duties requires time and attention. Suppose you have a busy schedule or would instead focus on other aspects of your role in your organization; an experienced financial advisor can be a great resource. 

Benchmarking

Financial advisors can help hold other service providers accountable. It can be tough to know if your plan is priced competitively compared to what your competitors are being charged. 401(k) fees are often paid through employee accounts as a percentage of their account balances. These fees can eat into participant assets.

A 401(k) advisor can help you look at multiple providers independently. They can run a benchmark report comparing your fees to similar plans and help negotiate costs on your behalf. 

Investments

Suppose you find the investment choices overwhelming or have limited knowledge about specific asset classes. An advisor can provide insights and help you build a diversified investment lineup. Some advisors can act as the plan's 3(38) investment fiduciary. 

Performance Reviews

Sometimes recordkeepers will reduce their fees if a plan utilizes their proprietary investment options. The problem is these proprietary investments provide additional income to the recordkeeper. These proprietary funds can make the service provider costs higher than they appear. These funds can perform well, but if they are no longer appropriate for the plan, it is unlikely that the provider will kick out their funds in favor of the funds of another provider. 

Financial Wellness

Financial wellness is becoming more critical to retirement plans. If you want your 401(k) program to compete well with other companies in your industry, having a solid financial wellness plan can help. While many recordkeepers will tout their proprietary software, having a financial advisor allows you to develop a wellness strategy for the tool. A great financial advisor can access other financial wellness tools outside the recordkeeper's software.  

Cost and Value

Financial advisors charge fees for their services, which can vary based on the level of service and the assets they manage. Not all advisors are equal in knowledge and experience. If your advisor is not pulling their weight, consider inviting other advisors to compete for your business. Requesting an RFP will allow you to compare fees and value.

Conclusion

Ultimately, running your 401(k) plan is up to you and your judgment. Hiring the right financial advisor for your 401(k) can help you as you fulfill your fiduciary responsibilities. Our retirement plan team can help you better understand your fiduciary duties and provide support. Our office is located in Salt Lake City, UT, but we serve clients in many states.

Bibliography

Department of Labor. (n.d.). Fiduciary Responsibilities. Retrieved from www.dol.org: https://www.dol.gov/general/topic/retirement/fiduciaryresp

IRS. (2023, June 5). Retirement Plan Fiduciary Responsibilities. Retrieved from IRS.org: www.irs.gov/retirement-plans/retirement-plan-fiduciary-responsibilities