What It Means To Be a Fiduciary?

Understanding your role as a retirement plan fiduciary.

Presented by: Michael Sayre, CPFA™, AIF®

Transcript

This is Michael Sayre, your 401(k) advisor here at CUI Wealth Management. Let's talk about some of the fiduciary responsibilities you have as a fiduciary of a 401(k) plan. And keep in mind that often, people don't realize that they're fiduciaries. So, it's important to determine who is a fiduciary in your plan and their duties and responsibilities.

Let's talk about fiduciary responsibilities in a broad scope, and to do this, let's start by defining what a fiduciary is. A fiduciary is a person or entity with a legal and ethical obligation to act in the best interest of another party. For example, in 401(k) plans, a fiduciary is a person or entity responsible for managing the plan and its investments. Several critical fiduciary duties and responsibilities are involved in managing a 401(k) plan. Here are a couple of these duties.

First is the duty of loyalty. The fiduciary must act solely in the best interest of the plan participants and their beneficiaries, putting their interests aside. This duty requires fiduciaries to avoid conflicts of interest. Conflicts of interest come about when individuals have split interests.

A typical example of this in the real world is when people decide to hire their advisor based on their relationship. Specifically, I see this a lot when people say that they're hiring a financial advisor because that financial advisor is the son-in-law. Or that the financial advisor is the neighbor. But as a fiduciary, you need to be able to show that you have impartiality in deciding on service providers. And that you have reasons backing that up, and not just solely based on the relationships you already have.

The next duty is the duty of prudence. Fiduciaries must act with the care, skill, prudence, and diligence that a prudent person would use in a similar situation. This duty requires fiduciaries to understand the Investments offered in the plan, monitor those investments, and make changes when necessary to ensure they continue to be appropriate for the plan's participants.

At CUI Wealth Management, we always talk with our clients about the importance of having a process. Of course, choosing the right providers, investments, and plan design are all important. But the question should be, how did you come up with those decisions? What was the process that you used? What were the metrics that you used to evaluate and compare the options?

The next duty is the duty to diversify. Fiduciaries must diversify the plan's investments to minimize the risk of significant losses. This duty requires fiduciaries to offer various investment options to the plan participants rather than relying on a single investment or asset class. But, distinguish this duty of diversification from the importance of selecting prudent investments.

For example, sometimes plan fiduciaries put together a large selection of investment options without due diligence. They think that the variety will excuse them from the obligation to carefully select appropriate investments.

The next responsibility is to pay only reasonable plan expenses. Fiduciaries must ensure that the plan's expenses are reasonable and necessary. This duty requires fiduciaries to understand the plan's associated fees because fees can erode participant assets over time. Costs are not a bad thing in and of themselves. But, you need to justify those costs with the appropriate value.

Knowing your retirement plan fees can help you benchmark and negotiate those fees. Our team here at CUI Wealth Management helps our clients benchmark and negotiate provider fees. In addition, providers are required to provide fee disclosures to participants and plan sponsors. So requesting those documents is a great place to start.

Next is to follow the plan documents. 401(k) plans allow for a lot of customization. However, retirement plans must follow their plan document and the provisions they adopt. For example, in 401(k) plans, you can adopt the option to allow loans. However, because 401(k) plans generally allow the option to take out a loan if your plan has not adopted the provision, you cannot simply let someone take a loan out.

If you need to change your plan design, talk to your advisor or third-party administrator to review your options.

I hope this has been helpful. Reach out to our team if you have any questions or needs. Once again, I'm Michael Sayre, your 401(k) advisor at CUI Wealth Management