There are many reasons to hire a fiduciary to help you manage your retirement plan. While fiduciary liability is an important consideration, the primary reason to hire a fiduciary who will act in your best interest is to help you minimize your plan expenses and assist you in managing your investments. When you start a new plan there are many important decisions that have to be made, including the type of plan that works best for your practice and Third Part Administrator selection and evaluation. For an existing plan an adviser can review your plan design and cost, and recommend ways to improve your plan, such as upgrading to a custom-designed 401(k) plan that can allow contributions of $54k, or moving to an open architecture record-keeper that allows access to low cost Vanguard index funds.
The most important aspect of your plan is investment selection and performance, so hiring an adviser who is proficient in investment management is extremely important. The best way to help yourself and your employees achieve better investment results is to offer individualized investment advice, which can also be provided by a fiduciary adviser. When hiring an adviser for your plan, there are several things to keep in mind:
1) An ERISA 3(38) investment manager is the highest level of fiduciary oversight for 401k plans. However, this has become a marketing gimmick for many companies, so you have to be aware what a 3(38) investment manager’s role is. A good 3(38) fiduciary will do the following:
- Create an investment policy statement for the plan which outlines the investment selection criteria and investment strategy.
- Select an investment lineup for the plan that contains a relatively small number (no more than about two dozen) of low cost index funds that do not pay any revenue sharing or 12b-1 fees to the investment manager.
- Set up and manage model portfolios for plan participants.
- Provide individualized advice to plan participants (or recommend and/or provide oversight for low cost third party services that can provide individualized advice).
- Do all of the above for a flat fee (while limiting or eliminating all asset-based fees from your plan).
Some advisers limit their services to selecting plan investment lineup only, and this by itself won’t help plan participants make good investment decisions.
2) As a plan sponsor, you have fiduciary liability for investment selection and monitoring for your plan. To limit this liability, you can hire a 3(38) investment manager. Advisers have to acknowledge their fiduciary status as a 3(38) investment manager in writing – unless they are a 3(38) fiduciary, and sign a contract with you where it says that they are taking fiduciary responsibility as a 3(38) investment manager, you have done nothing to limit your fiduciary liability – you will still remain the fiduciary in charge of investment selection and performance.
Individualized advice is arguably the best way to limit your liability with respect to losses by plan participants – if every participant has a portfolio that is selected by a fiduciary adviser, then your only liability is the selection of the adviser.
3) Sometimes a 3(38) manager will team up with a 3(21) adviser (co-fiduciary) who can provide some plan services such as educational seminars, and individualized participant advice. For a small plan, there is no value in hiring an adviser unless you get the full scope of services including investment management and individualized advice. There are several companies that can offer individualized advice cheaply, which can be a cost-effective way of delivering advice to plan participants. However, advice provided by third parties to plan participants has to be overseen by the 3(38) investment manager because the quality of such advice will depend on the quality of the plan investments and model portfolios.