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Must Read for the Summer: Top Fiduciary Questions 401k Plan Sponsors Must Ask (But Sometimes Don’t)

Must Read for the Summer: Top Fiduciary Questions 401k Plan Sponsors Must Ask (But Sometimes Don’t)
July 03
00:02 2018

For many plan sponsors, their real job has nothing to do with running the company retirement plan. Yet, being named a plan sponsor may carry greater personal risk than their real job. We went around the country asking financial professional to identify up to three fiduciary questions every 401k plan sponsor must ask, what the best answers to those questions are, and what they are important. Here’s what we found:

Jerry Lynch, president of JFL Total Wealth Management in Boonton New Jersey, offered these three questions:

Question: “Can I document how I manage our 401k plan?”
Answer: Yes.
Why this question is important: If you ever have a problem with your 401(k) plan, you win or lose a case on how well can you document the things you do to manage the plan effectively.  This includes trustee and educational meeting, fund reviews, reviews or the plan expenses.  Make sure every meeting has notes that reviewed what you discussed and what the outcome was,

Question: “Does it cost to run our 401k plan and what cost are paid by the employees?”
Answer: Yes, and it is documented.
Why this question is important: There is tremendous pressure on employers to make sure the expenses on the plan are reasonable Your fees don’t have to be the lowest, but they do need to be reasonable for the services provided. Can you document that the fees are reasonable and what supporting proof do you have to support that.

Question: “How do I protect myself from being sued due to my position as a fiduciary on the 401k?”
Answer: You protect yourself with fiduciary insurance, documentation and having an effective process to manage the plan.
Why this question is important: If your personal assets are at risk, you don’t want to lose them because of a mistake. If there is a problem you are a target personally so protect yourself with adequate insurance, make sure you have an effective process and document everything

Jon Stein, CEO of Betterment for Business in New York City, suggested these two questions:

Question: “What is a fiduciary, and how do you know if your advisor will fulfill that role?”
Answer: A fiduciary is a very important distinction investors should rely upon and means he or she has no conflicts of interest with you.
Why this question is important: You don’t know if that advisor will fulfill that role. That’s one of the most frustrating parts of the current state of the financial advice industry. One way to make the distinction is to state whether or not you, as the fiduciary, make commissions on the account or do you make more by selling me one product over another one?

Question: “How does automated investing fit in with the traditional advisory model?”
Answer: Software-based investing is still a new field, but it is very well-poised to serve a wide variety of investors at a low cost.
Why this question is important: Unlike human investors, software is unemotional and can help you do things you might not want to do on your own. If the financial advisor is merely acting as a gatekeeper to asset allocation and fund selection—things I deem to be commodity services—consider using automated investing and saving money.

Randy Kurtz, Chief Investment Officer at Betavisor, LLC in Chicago, Illinois saw this as an important question:

Question: “Why is the portfolio allocated as it is?  Thus, why exactly is the exposure to U.S. stocks the amount it is?”
Answer: The answer is nuanced. Your exposure to U.S. stocks should incorporate valuation (if your favored method of valuation indicates U.S. stocks are expensive, you should own less of them), as well as correlation (if your data indicates U.S. stocks are highly correlated to the rest of the world, you should own less of them).
Why this question is important: This is important because fiduciaries don’t guess with other people’s money.  Fiduciaries have defendable reasons for allocating portfolios, and these reasons are not just hunches.

Robert Pascuzzi, author of the book Get Tough-Retire Rich: Amassing Your Fortune After 40 and Director of Corporate Retirement Plans for Creative Planning, Inc. in Kansas City, Missouri, pointed out this could be a critical question all 401k plan sponsors should ask:

Question: “Who does our investment professional represent?”
Answer: The broker’s obligation is to represent the firm they work for and its stakeholder.  A fiduciary advisor is legally obligated to act in their client’s best interest, so they represent the client.
Why this question is important: The fact is that approximately 90% of advisors of the advisors in America are brokers some, or all of the time. It is so important to know the answer to this question, because if a Plan Sponsor does not know the answer, there is a good chance that they are working with someone who is not able to provide objective advice. If the investment consultant is licensed as a broker, then they do not have a legal obligation to act in their client’s best interest under the current set of laws.

Financial Security Expert and two-time New York Times Bestselling Author Pamela Yellen says:

Question: “What is this product’s true track record over the long run?”
Answer: Answers will vary, but they are less important than the reason for asking the question.
Why this question is important: “Get performance figures verified by a third party, not claims in sales literature from sales literature.”

Chip Simon, Co-Owner, Taconic Advisors, Inc. in Poughkeepsie, New York proposed these two questions:

Question: “What exactly is a financial ‘conflict of interest’?”
Answer: It means a professional’s advice could be somewhat self-serving.
Why this question is important: It’s important to understand because you want to completely trust the financial advice you receive. If an adviser makes money from a transaction that he or she recommends, for example, that compensation “incentive” may cause the adviser to provide advice that appears to serve your needs, but may actually work against your longer-term interests. These “side effects” are often not disclosed to you in advance. However, if the adviser has no stake in the outcome of your decision, and the adviser can give you a complete picture of how his advice will affect you, you are likely to feel more confident and comfortable with your decisions.

Question: “I’m also interviewing some other financial professionals (non-fiduciary) for my account and wonder what question you would have me ask them?”
Answer: Please ask them, “If you weren’t allowed to sell me any products, what kind of advice would you give me?”
Why this question is important: It’s important because where you receive advice determines how ignorant (or informed) you will be when you make your decisions. Financial professionals are often limited by their business models. A product-selling professional can’t help with cash flow issues like paying down debt. Money managers are restricted from providing income tax guidance, a primary financial concern for most everyone. The more trained your financial professional is in all areas of finance, the more likely you can receive advice that addresses your interests comprehensively and free of advisory “tunnel vision” that can create conflicts.

Meredith W. Briggs, Co-Owner, Taconic Advisors Inc. in Poughkeepsie, New York gets right to the meat of this issue with this question:

Question: “How do you get paid?”
Answer: Again, answers can vary, but it is the reason for asking the question that’s most important.
Why this question is important: If your adviser cannot clearly explain how they get paid, then you do not really understand how they are motivated to advise you. A real fiduciary will not accept commissions or awards for placing specific products; that creates a conflict of interest which a fiduciary must avoid. This is the most black-and-white way to evaluate someone’s true motivations. As the saying goes “follow the money!”

Many guides for 401k plan sponsors seem as though they are written like text books. These eleven questions come direct from real-world practitioners. They don’t sugar coat anything. They don’t bury their meaning in some deeper morass of philosophy. They are straight-forward. They are direct. They are practical.

In the end, isn’t this the kind of guideline most busy 401k plan sponsors most appreciate?

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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