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NOT Offering Participant Investment Advice – a Fiduciary Decision?

Jan. 18, 2011 1:17 PM ET
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Smart401k's Blog
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Let’s think about that for a minute. The decision to select an investment adviser is a fiduciary decision. Plan fiduciaries can limit liability by documenting fiduciary processes. What are the implications of those statements when you read them next to each other?

If the decision to hire an investment adviser is a fiduciary act, then it’s arguable that the decision NOT to hire an investment adviser is also a fiduciary decision. I’ve heard people call this ‘two sides of the same fiduciary coin.’

That’s right. I believe the act of not hiring an investment adviser is a fiduciary action. Consequently, like any other fiduciary decision, plan sponsors should follow the same prudent process in deciding not to hire an investment adviser. Further, plan sponsors should document the process to show they were acting in the best interests of participants.

There have been numerous lawsuits claiming a plan sponsor did not do something they should have done as a plan fiduciary: not negotiating lower fees, not offering institutional class shares or not negotiating to offer non-proprietary investment products with a record keeper. These cases are all based on something a plan fiduciary did NOT do. Inaction is an action. As a result of their inaction, these plan sponsors failed to meet their fiduciary responsibility.

With the availability of data, ignoring the issue by not evaluating the merits of offering available advice alternatives does not seem like a prudent path to take. Industry statistics clearly show participants need help when it comes to retirement plan investing:

  • 81% of plan sponsors indicate that their employees struggle when it comes to selecting investments in their retirement plan.(1)
  • Retirement plan investors make investment related errors when managing their accounts that costing themselves between $5.9 and $10 billion dollars a year.(2)
  • The average equity investor posted returns of less than 2% per year over the last 20 years, while the S&P returned over 8% annually.(3)
  • After receiving help from an investment professional, individuals experience greater returns of nearly 2% per year net of fees.(4)
The list goes on and on. As a result, I believe that plan fiduciaries are increasing potential liability when they do not document a prudent process of deciding whether to offer investment advice or other tools to help participants – even if the decision is that they will not provide advice or tools.

In the same vein, plan advisers who have been hired to help plan sponsors mitigate fiduciary exposure should have conversations with plan sponsors about the risks of inaction. Perform an evaluation of the merits of offering an advice program. As you would with any other service provider, consider the options available, the benefits of each option and fees. A well-documented cost-benefit evaluation process will allow you to make a prudent decision and fulfill fiduciary obligations.

Scott Swezy
Vice President, Smart401k

About Smart401k
Smart401k is a web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans. Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at Smart401k.com.

1- CFO Research Services with Charles Schwab collaboration, Getting Retirement Savings Back on Track Employer Views on the 401k and Financial Education in the Workplace, June 2009
2- Department of Labor, 2010
3- Dalbar Study 1988-2008, 2009
4- Hewitt and Financial Engines, Help in Defined Contribution Plans: Is It Working and for Whom, January 2010

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