Fiduciary Responsibility

Plan sponsors need to understand and monitor their retirement plan fiduciary responsibilities to insure that the participants come first.

1. Safe Harbor Protection Act

2. Fiduciary Responsibility

3. Investments

4. Conclusion

1. Safe Harbor Protection Act.

Many plans do not encompass all the 404c rules. The 404c rules are also known as the Safe Harbor Protection Act for 401k plans.

To qualify for the Safe Harbor Protection the plan sponsor must demonstrate that they qualify for the twenty plus 404c rules.  Safe Harbor Protection is the main reason why many companies have selected a 401k plan.  In my experience, many companies aren’t qualifying for these stringent rules.

Most companies should be conducting an internal audit to make sure they are in compliance with the Safe Harbor Protection Act.  Most companies believe they qualify but in reality they don’t. Only a few companies have knowledge of these requirements and yet fewer do their own preemptive reviews.    This often creates quite a surprise because plan sponsors often feel that  someone is taking care of their 401k program, when legally, the plan custodians, not only can’t help, but the “plan” has knowingly designed in a conflict of interest, often accompanying additional hidden fees, with the plan sponsors.  This embedded self interest makes liability to the company much higher and of course produces higher costs.

2. Fiduciary Responsibility.

Companies have a “fiduciary responsibility” to invest prudently. The companies are also responsible to understand and maintain their due diligence.  Many companies are under the impression that Third Party Administrators, the Insurance Company’s, or the Broker is taking care of them. You can not transfer fiduciary responsibilities.  To help reduce company’s dependences on self interest in retirement plans the Department of Labor (DOL) set co-fiduciary rules where a co-fiduciary can relieve responsibilities and accountability from the plan sponsor.

Fiduciary standards must put the retirement plan before any personal goals. It must be reasonable and prudent.

Suitability standards can and do put themselves and their firm first before the plan. The self interest standard is where the hidden fee problems are focused on.

Basically, to be in compliance with all the rules you must incorporate fiduciary standards. A simple way for you to understand if your support services are a fiduciary is to ask them.  A basic fiduciary requirement for companies is they need to understand and eliminate all conflicts of interest, and that of course will reduce, if not eliminate, hidden fee’s.

Ask your service provider if he is or is not a fiduciary and either way get it in writing.

The suitability standard with the self interest creates a lot of conflict and makes it much harder for firms to:

1. Qualify for 404c Safe Harbor protection.
2. It increases company’s liabilities.
3. Increase’s cost.
4. It has conflict of interest.
5. Greatly increase the fiduciary requirements of the firm.
6. With the Suitability Standard, the plan sponsors must have company fiduciary’s do for the following:

• Must review the cost structure.
• Select the Mutual Funds.

By law, and on paper, those investment committees should have in place criteria by which they will choose which mutual funds to offer employees. They should also have in place criteria by which they will keep or toss mutual funds from the menu being offered to employees.

• Advise on investments for the firm.
• Identify a fiduciary for participant.

• Select and monitor default investments

Many of these fiduciary requirements are in an unknown void; the plan sponsor is thinking the custodian is handling these responsibilities.  The custodians knowing they don’t have to disclose any conflicts of interest, that fiduciaries must, are hiding their conflicts of interest and or many of their extra fees.  The DOL rules say, if the fiduciaries lack the knowledge to manage their investment plan prudently, they may seek advice.  In fact the law requires them to get help.

Program’s that have self interest guidance often have a far higher cost structure.  Few firms are willing to provide a comprehensive review both in investments and compliance.  Companies need help understanding and monitoring their fiduciary responsibilities.

Companies need compliance guidance help to:

1. Achieve and maintain Safe Harbor.

2. Understand the many Fiduciary regulations.

3. Tighten regulatory controls.

4. Reduce company’s liabilities.

5. Reduce overall cost. 

3. Investments

It is my recommendation that company’s select investment advisors that work under the Global Standard of Fiduciary Excellence. The Global Standard of Fiduciary Excellence is designed to ensure investment process is focused on all the components of a comprehensive investment process with built in fiduciary standards of care and commitment to excellence.

Qualified investment programs must start adhering to truly comprehensive investment fiducially standard of care and get away from a self servicing.   This practice should also apply to other non qualified accounts. 

We believe the best investment approach in ERISA qualified retirement and others non qualified plans are utilize index mutual funds, or “The Vanguard Approach.”  The combination of low cost, strong performing indexed mutual funds and the Global Standard of Fiduciary Excellence guidelines in allocating, selected and monitored, creates a dynamic investment model.

Indexed mutual funds have:

1. Often substantially lower cost.

2. Follows prudent investment requirements.

3. Create truer diversification.

4. Lower over risk.

5. Outperform about 75% of active managers over time.

4. Conclusion

It is surprising that when you build compliance into your solution from day one and work inside of the Global Standard of Fiduciary Excellence utilizing best practices in investing.  You often could attain:

1. Better investment performance over time.

2. Lower cost.

3. Tighter Regulatory Controls

4. Lower Liabilities.

5. Help Eliminated conflicts of interest.

6. Lower Investment Risk.

With transparent, open, hard work these goals are achievable.

You can reach Randy at www.durig.com

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