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Is your 401(k) plan advisor a fiduciary or a broker?

As a plan sponsor, a lot of responsibility rests on your shoulders to oversee the 401(k) vendors of your plan.  There are clear steps you can take to minimize your fiduciary burden related to your plan.  We have put together the following questions to help you understand what roles your current 401(k) advisor is filling.  

Questions to ask your 401(k) plan advisor:

  1.  Are you fee-only or fee-based?
  2.  Are you Series 7 or 65 licensed?
  3.  Do you serve as a fiduciary for our 401(k) investments?
  4.  Are you legally obligated to put our best interests ahead of yours?
  5.  Do you provide our company with 3(21) or 3(38) services?
  6.  Can you accept commissions, 12b-1 fees, or other payments from the investments you recommend for our plan?  Are you currently accepting these forms of compensation?
  7.  Are you regulated by the SEC or by FINRA, or both?

The answers to these questions will help you determine how the advisor gets paid and whose best interests they represent.  After all, there’s nothing worse than paying excessive fees for advice that isn’t in your plan’s best interests.  

Below, we explain the significance of the questions above and the answers a plan sponsor should hope for:

  • Fee-only means the advisor is only paid a level fee by the plan, not by commissions or revenue sharing (12b-1 fees) from the investments used in the plan.  Fee-based means in addition to charging a level fee, the advisor can accept commissions and 12b-1 fees from the investments used in the plan.
  • Series 7 means they are a broker who can be paid by commissions.  Series 65 means they are a registered investment advisor.
  • If the answer to question #4 is no, then all of the fiduciary responsibility falls squarely on your shoulders as a plan sponsor.  
  • 3(21) services mean the plan advisor provides investment advice.  The advisor recommends investments for the plan, but ultimately, the plan sponsor is responsible for any decisions made.  Plan advisors serving in a 3(38) capacity have full discretionary authority to select, monitor, add, and remove funds to your lineup.  The plan sponsor’s fiduciary duty under a 3(38) arrangement is to oversee and monitor the plan advisor.  If you want to offload the most fiduciary burden possible, go with 3(38).
  • Question #6 highlights potential conflicts of interest.  If the advisor is paid by the investments they recommend, they’re less likely to recommend lower cost investments that don’t pay the advisor.  That’s a conflict of interest.  

Ready to take the first step?  Fill out the form below to initiate our complimentary and no strings attached 401(k) plan checkup.

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