As a person held to the Fiduciary Standard, I have continued to highlight the issues concerning the high fees buried inside of 401k plans, the lack of objective advice provided to investors and under-performing investments. We talked extensively about this topic on the Financial Spotlight radio show:
“There are a lot of very fine financial advisors out there, but there are also financial advisors who receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns. So what happens is these payments, these inducements incentivize the broker to make recommendations that generate the best returns for them, but not necessarily the best returns for you.”
Remarks by President Barack Obama at the AARP, February 2015
Eliminating a conflict of interest in investment advice is a step in the right direction, there is still no guarantee this will get pushed through because of the lobbying power of the insurance and investment companies that stand to lose billions.
What is the fiduciary standard?
The fiduciary standard means that the highest priority for the advisor or broker is to recommend investments in their client’s best interests, not their own.
Unfortunately, the vast majority of financial professionals – brokers, registered representatives amongst a myriad of other titles – are held to what is called the suitability standard. This standard is much less stringent and allows them to recommend investments that may deliver significant compensation to them and are not necessarily in the best interests of the client. Hence the President’s shot across the bow.
Protecting your retirement savings
So although this is a step in the right direction, there is still no guarantee this will get pushed through because of the lobbying power of the insurance and investment companies that stand to lose billions.
Take the following steps on your own behalf:
- Ask your advisor if they adhere to the fiduciary standard. If they do they will tell you right up front and will acknowledge it in writing. If they don’t they will dance around the question.
- Find out if a Registered Investment Advisor (RIA) is helping to administer your company’s 401k plan. RIAs generally serve in a fiduciary capacity, but not always so be cautious as some can function as both a registered investment advisor and a broker.
- Be aware of your options during transition times, such as changing jobs or retiring. Don’t simply roll over your money just because a commission hungry financial person tells you it’s a good idea. Sometimes it can be a good idea to do so but many times it may not.
401(k) Plan Sponsor Fiduciary Responsibilities
If you are a business owner, you have different responsibilities and challenges.
The first challenge is that few, if any, small companies understand the fee structure of their plan. Although investment providers are now obligated to disclose the fees being charged for the plan, the way it normally is done is very confusing even for the financially astute.
The second challenge is that you, the plan sponsor, are being held to a level of a fiduciary. This comes with risks that many business owners don’t even realize. These responsibilities can be found by visiting the Department of Labor website.
If after reviewing your responsibilities, you feel you are unable to administer your 401(k) plan as a prudent expert then you should seriously consider doing what the DOL says you should in this instance – hire someone who is.
I often do not agree with our commander in chief, but I do have to give the president a pat on the back. Thank you for stepping up for the little guy who is most affected by higher fees and needs the best investment advice they can get preparing for retirement.