“Truth is such a rare thing; it is delightful to tell it.”
— Emily Dickinson
The 401(k) market is very interesting. It is dominated by non-fiduciary entities like insurance firms, brokerages and banks.
Non-fiduciaries cannot accept fiduciary liability. Therefore plan sponsors are carrying all the fiduciary liability themselves. But the fiduciary liability isn’t the worst part of it. Excessive expenses and poor diversification hurt the long term return of participants in these plans. In other words, millions of Americans will have smaller 401(k) balances long term than they could have had due to these forces in the market place.
What are two main responsibilities of prudent fiduciaries overseeing management of money:
- Transparency of expenses, reasonable expenses for the value received and
- Diversification, diversification, diversification
Important note: you have to have transparency before talking about expenses – without it, you are just speculating. This is one of the most common mistakes of plan sponsors. Transparency first! Don’t assume you have it!
The firms that dominate the 401(k) market use the word “fiduciary” as often as possible, giving the impression that they are fiduciaries and they help with it. Well, what they do is “help” you take on the fiduciary liability, while accepting none of it! It’s misleading. The recent (July, 2010) financial reform package may make an impact. There’s a part requiring disclosure of fiduciary status. But every attempt over the last 20+ years to rein in these 401(k) excesses, and force transparency have fizzled or workarounds were found. These large firms have significant influence in Washington DC (lobbyists).
In a typical 401(k) plan, incremental improvements can be made without leaving the basic structure in place. You can attempt to force the parties involved to be transparent (we can help), and then reduce expenses. You can improve the fund offerings. But there is a limit.
To achieve what we would call an “elite” plan, the first key structural change is to add an ERISA Section 3(38) advisor. You do that by selecting a local 3(21) advisor that brings a 3(38) advisor with them. The 3(38) advisor takes on discretionary investment selection and monitoring along with the fiduciary liability. That is an immediate huge drop in fiduciary liability on the plan overseers and typically a major upgrade in investment options for your participants. They will provide a fund selection line-up that reduces the chance of any one of your participants making an egregious asset allocation mistake.
What to do next:
- To learn more call us. We provide educational sessions regularly.
- Depending on your situation, we may be able to offer a complete analysis of your existing plan at no obligation. We can provide you a tool and strategy to help you get more transparency in your existing plan. Call us.
- Be sure to sign up for our quarterly 401(k) newsletter and review our newsletter archive.
- Learn more. See the links below for several excellent 401(k) articles, and our 401(k) brochure.