401(k) Best Fiduciary Practices
For Plan Overseers that Take Their Fiduciary Role Seriously
In This Issue
DOL Says No Advice Is Better
Common Mistakes
What to Do Next
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First the "Hidden Break Through" - it's been available but not well undestood

 

From our previous e-mails, you should know the the only way to significantly reduce your fiduciary liability is to fully delegate the duty of selecting the funds in your plan.   You do that by making sure you have an ERISA Section 3(38) independent investment advisor who takes this duty in writing.    Even if you have an advisor on the plan who "recommends" funds - that is meaningless in terms of delegating the liability, 100% still falls on you.    They must take on the fund selection on a discretionary basis.  Not sure?  Ask them to put in writing, "We take on the fiduciary responsibility under ERISA Section 3(38)".     If you have to ask for it, it's fairly certain you are not currently delegating one bit of the fiduciary liability.    You could also hire an attorney well-versed in matters of ERISA. 

 

If you do this delegation correctly, you'll off-load approximately 80% of your company's fiduciary liability. 

 

Most plan sponsors have not fully understood what I have just explained above.   Let me know if you need more.  I have many articles written by various experts on this topic.   Every plan sponsor needs to know!  

 

What's the new breakthrough?   Well this is very exciting!

 

It's called a "MEP" - multiple-employer plan.    A MEP has an unlimited number of unrelated companies as "branches" in one plan with one plan sponsor.    Let's assume that our MEP is the superior plan type described above in which the MEP's plan sponsor has fully delegated fund selection to an independent investment advisor. 

 

If you plug into a MEP as described above, you still need a liaison that oversees your company's participation - but you no longer have a plan sponsor & the level of responsibility that went with it.   You should also have a local independent advisory firm that is licensed to provide investment advice to your employee population.   (That is our role.) 

 

Results:

 

1) Assuming you have a plan with an ERISA 3(38) advisor, you get an additional 80% reduction in fiduciary liability.

2) You may also get a reduction in plan costs because you get an economy of scale that you may not have had before - and other plan level costs are spread across all the companies in the plan. 

 

Bottom Line: Upgrading your standalone plan to one that includes an advisor taking on ERISA 3(38) responsibility is huge as it is.    Now make that a MEP plan and there's another order of magnitude improvement! 

Common Mistakes

 What's keeping you from moving into a clean and transparent 401(k) structure? 

 

1) The RTC (resistance-to-change) Factor:  Human beings including plan sponsors don't like change.  This is a time when making a move makes sense - but only if you move to a completely transparent plan.    

2) They Won't Let Go - It's Too Profitable!:   The 800 lbs. gorilla insurance companies and brokerages are going to do everything in their power to keep their clients in place.  It will be interesting to see how they react and what they say as new regulations continue to eat away at their non-transparent models.

3) Waiting Too Late:  There's no reason to wait.   Get into a superior transparent plan and don't wait for the messiness of the non-transparent firms attempting to be transparent.

What to Do Next
 
Problem Solved:   Use an ERISA Section 3(21) independent advisor (RIA) that insists on bringing an ERISA Section 3(38) independent advisor (RIA) with them.  They both have strict disclosure requirements built into their licensing so that complete transparency is the norm from day one.   They'll be watching each other as well as the TPA, record-keeper and custodian, that are also independent.    Great checks and balances - a fiduciary wouldn't have it any other way.

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Until our next quarterly 401(k) issue.
 
Sincerely,

John O'Reilly
O'Reilly Wealth Advisors
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