Quick Summary
Sponsoring a 401(k) makes you an ERISA fiduciary, and the law measures you against someone who understands retirement plans, not a typical business owner. An independent plan advisor is paid a disclosed fee that does not depend on which funds or providers your plan uses. A good advisor monitors investments, benchmarks fees, reviews vendors, and keeps a fiduciary file that documents your process. If you cannot name your advisor or say what your plan costs, it is time for a review.
Most small business owners start a 401(k) for good reasons. They want to help employees save, compete for talent, and put money away for their own retirement. The plan often gets set up through a payroll company, an insurance carrier, or a broker who handled the paperwork and moved on. Years later, the plan is still running, contributions are still going in, and the owner assumes someone, somewhere, is keeping an eye on it.
That assumption is where problems start.
You are already a fiduciary
When your company sponsors a 401(k), the business and the people who make decisions about the plan become fiduciaries under the Employee Retirement Income Security Act of 1974, better known as ERISA. That status is not optional, and it does not depend on whether you ever signed a document that used the word "fiduciary."
ERISA asks fiduciaries to:
- Act solely in the interest of participants and their beneficiaries
- Act with the care, skill, and diligence of a prudent person familiar with these matters
- Diversify plan investments to reduce the risk of large losses
- Follow the plan document
- Pay only reasonable fees for plan services
The phrase "a prudent person familiar with these matters" is the important one. Courts and the Department of Labor do not grade you against a typical business owner. They grade you against someone who understands how retirement plans work. If you do not have that expertise in house, the prudent move is to bring it in.
Fiduciaries can also be personally liable for losses caused by a breach of these duties. That is usually the part that gets an owner's attention.
What "independent" actually means
Plenty of people get paid when a 401(k) exists. Not all of them work for you.
An independent plan advisor is one whose compensation does not depend on which funds are in the plan or which recordkeeper you use. In practice, that usually means:
- No commissions or sales loads
- No revenue sharing paid by fund companies
- No incentive to keep the plan with a particular provider
- A fee that is disclosed in writing and does not change based on the products selected
Compare that with a sales representative from a recordkeeper, or a broker paid through the funds in the plan. Those people may be helpful and well intentioned, but their pay is tied to the products. When the person recommending investments is paid by the investments, you have a conflict of interest to manage.
What a plan advisor does day to day
The work is less glamorous than it sounds, and that is the point. A good plan advisor builds a routine that keeps the plan in order and leaves a paper trail showing you were paying attention. Typical services include:
Investment selection and monitoring. Building a lineup, reviewing it on a regular schedule against written criteria, and replacing funds that no longer meet them.
An Investment Policy Statement. A written document describing how investments are chosen, monitored, and replaced.
Fee benchmarking. Comparing what your plan pays with what similar plans pay for similar services, and helping you act on the results.
Vendor reviews. Evaluating your recordkeeper and administrator, and running a search when it makes sense to look elsewhere.
Plan design. Helping you decide on features such as automatic enrollment, a Roth option, safe harbor contributions, or profit sharing.
Participant education. Helping employees understand the plan and use it well.
A fiduciary file. Meeting minutes, reports, and decisions organized so you can show what you did and why if anyone ever asks.
Co-fiduciary or investment manager
Plan advisors generally take on one of two fiduciary roles. Under ERISA section 3(21), the advisor makes recommendations and you make the final decisions. Under ERISA section 3(38), the advisor is appointed as an investment manager and takes discretionary responsibility for selecting and monitoring the investments. The 3(38) structure moves more of the investment work, and the responsibility for it, off your desk. We cover the difference in more detail in a separate article.
Signs your plan may not have one
Ask yourself a few honest questions:
- Can you name your plan's advisor and describe what they do for you?
- When was the last meeting where someone walked you through the investment lineup?
- Do you know, in dollars, what your plan pays each year and to whom?
- Has anyone told you, in writing, that they act as a fiduciary to your plan?
- Is your advisor paid through commissions or fund revenue?
If several of those answers are "I'm not sure," your plan may be running without the oversight ERISA expects.
Questions to ask a prospective advisor
When you interview advisors, a few questions help separate retirement plan specialists from generalists:
- Will you acknowledge fiduciary status in writing, and in which role?
- How are you paid, and will that change if we change investments or providers?
- How many retirement plans do you work with, and how large are they?
- What will we receive each year, and how often will we meet?
- Can I see a sample investment review and a sample fee benchmarking report?
The bottom line
Your plan is a promise to your employees, and ERISA holds you to a high standard for keeping it. An independent advisor does not take the plan off your plate entirely, but the right one turns an open-ended responsibility into a manageable process with clear documentation.
Want a second look at your plan? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to review their 401(k) plans. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review. Our office is at 35 North Main Street, Suite 3A-10, Southington, CT 06489.
Frequently asked questions
Is a 401(k) plan legally required to have an advisor?
No. ERISA does not require an advisor. It does require fiduciaries to act with the skill of someone familiar with retirement plans, and hiring a qualified advisor is a common way to meet that standard.
Who pays the advisor's fee?
It depends on the arrangement. Fees can be paid by the company directly or, in many cases, from plan assets. Fees paid from plan assets must be reasonable and properly disclosed.
Does hiring an advisor remove my fiduciary responsibility?
Not entirely. You remain responsible for prudently selecting and monitoring the advisor. A 3(38) investment manager takes on responsibility for investment decisions, but the duty to choose and oversee that manager stays with you.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.