Why You Don’t Need a 401(k) Advisor
“You have a fiduciary responsibility to hire an advisor!” I can’t tell you how many times I heard one of my clients state they received a call like this from an “advisor”. But wait, is that true? No, that is not always true! You may not need to hire a 401(k) advisor. However, I’ll outline why that could very well be the case and why it may not be.
ERISA outlines the fiduciary standard of care in section 404 with these four topics:
Loyalty
Prudence
Diversification
Following plan documents
Let’s specifically focus on Prudence. This is likely where someone may base their statement that it’s a plan sponsor’s responsibility to hire an advisor. It states:
A fiduciary will discharge their duties…”with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
The fiduciary here refers to the person responsible for running the plan, making decisions, and they are required to act/execute their duties as a prudent person. A prudent person is one with skills and knowledge in the subject area at hand. Here we are talking about evaluating investments, understanding and following the plan document, and operating the plan compliantly. This is not something to be taken lightly as you are dealing with money that is not yours! In light of that, the plan sponsor may actually be able to fill this role. A good process to filter the decision through is will, skill and time.
Will - do you actually want/desire the full responsibility for running your plan? Do you want to devote the time to monitoring the investment options in your plan? Does reading your plan document and staying compliant get your energized or drained?
Skill - do you possess the skills necessary to administer your plan? Do you understand the multiple facets of mutual funds and asset classes (expenses, turnover, performance relative to peers, number of holdings, risk, large cap, small cap, international, fixed income)? Do you know why you may have five large cap growth funds all from the same fund company? Do you understand passive vs active management and the values that both may offer? Do you know how to design your plan to meet your objectives?
Time - this is the simplest one to think through. Do you have the time to dedicate yourself to running the plan as a prudent person would? Or do you have several other projects, people management, and just plain work that actually keeps your business running?
In my time working with small to medium size businesses, I often find the lack of all three (will, skill and time). Specifically because the people responsible for the plan are typically the owner and a support person or two. They are always wearing multiple hats to the point where I have guessed the 401(k) may take 10% of their time at most (and that’s administrative in nature). Additionally, having an understanding of investments and requirements to run a 401k plan is not a widely held skill. A plan sponsor may turn to someone who has done the training, committed the time, worked with many clients in a similar nature and could be the prudent person needed to help.
At this point you should evaluate which camp you fall into:
DO NOT HIRE AN ADVISOR if you have the will, skill, and time to run the plan. In other words if you have the dedication to running the plan, knowledge of investments, 401k plan administration and compliance and you have the time to dedicate to it.
HIRE AN ADVISOR if you just don't have the will/desire to run and operate the plan in the prudent person standard outlined in ERISA.
HIRE AN ADVISOR if you do not have the skill/knowledge of investments and 401(k) compliance.
HIRE AN ADVISOR if you do not have the time to devote to running and reviewing appropriately.
It’s worth noting that as long as you have a 401(k) plan, you’ll always have fiduciary duties. If you hire an advisor, you are outsourcing a lot of the work, but you must still monitor them and the reasonableness of their fees (same with TPA’s and plan providers).
P.S. Not all advisors are equal. It’s important to find someone who has the skills to help you run your 401(k), will listen to you and your needs first, and not sell your employees financial products or services. To learn more about how Chisholm Wealth Management can be this kind of advisor, click the schedule appointment button at the top of the page for a free consultation.
