As an ERISA attorney, I do get to talk to a lot of financial advisors and ERISA independent fiduciaries around the country, and the lament is that many plan sponsors don’t understand or care about such important fiduciary problems like excessive administrative fees, the lack of an investment policy statement, and the lack of education given to plan participants.
However, sometimes a 401(k) plan sponsor will understand and care without any help. Quite a few years ago, I got a phone call from a doctor from a medical practice. He indicated to me that he thought that there was something wrong with the plan. The plan was being handled by a broker who owed his position in his familial relationship with one of the doctor’s partners. This doctor questioned the third-party administration (TPA) firm (owned by a law firm) and his broker about the plan’s insurance-based platform. Since the plan had 200 participants and $14 million in assets, this doctor thought he could do better with an unbundled provider. The TPA and broker said it was impossible. The doctor was also concerned about fiduciary guarantees offered by the plan’s custodian. The doctor decided that his medical practice should retain my services for a Plan Tune-Up (yes, cheap plug, the $750 plan review that I still shill).
Since the Plan was a safe harbor, discrimination testing wasn’t an issue. A review of the census and valuation reports didn’t show major issues. When it came to plan expenses and a review of investment options, there were plenty of issues. First off, the Plan had 63 different investment options, 63, no joke. I am under the belief that 12-15 investment options are more than enough because studies have shown that more investment options depress employee participation. After all, more choices add to more confusion. A review of plan expenses showed that the fees all in (including the advisor) were more than 200 basis points, which was extremely high for a plan that size. The broker, who has no fiduciary role, netted 60 basis points. I questioned the plan sponsor and there was no investment policy statement and no education was given to plan participants. The plan sponsor also didn’t have fiduciary liability insurance. Needless to say, the plan sponsor was paying a boatload in fees and getting little minimization of their liability.
The Tune-Up noted the concern over the investment options, plan fees, and lack of work performed by the broker. I recommended that an ERISA §3(38) advisor (which the doctor asked about) could offer full protection from liability on the investment process and do it for less than what the broker is collecting for doing nothing.
After reviewing the Tune-Up and having me on the call for a partners meeting, the doctor advised me that the plan sponsor quickly decided to replace the broker and the TPA and hired a new ERISA §3(38) fiduciary who will help them select a new custodian and a new TPA. This was done without my input, this was done because the plan sponsor only took my review as a confirmation of what they already knew.
So when people will tell me that plan sponsors don’t get it or understand their role as plan fiduciaries and the liabilities attached to it, I am reminded how plan sponsor can understand their role without any help from a financial advisor or an ERISA attorney.