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Thayer Partners Blog

Employers Are Worried About Screwing Up Your 401k and Here Is Why

[fa icon="calendar"] Nov 4, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Employers-Are-Worried-About-Screwing-Up-Your-401k-and-Here-Is-Why.jpgIf you’ve been keeping up with financial news lately, you’ve no doubt noticed a new trend: class-action lawyers have begun targeting retirement plan sponsors for a wide variety of breaches of the fiduciary duty as well as a broad range of entities in retirement offerings.

It’s no surprise, then, that many employers are worried about messing up your 401k, according to a new survey on the topic.

New Survey Results

According to the seventh annual Fidelity Investments Plan Sponsor Attitudes Study—a survey of small and mid-size plans—38% of plan sponsors are concerned about their fiduciary duty and the risk of being sued, up from 24% just one year ago. And for the first time, the need for a formal fiduciary role has become more important than ever, coming in as the top reason why plan sponsors are turning to financial advisors, with 69%.

What This Means

Employers are beginning to understand that they do not have the required expertise and experience in house to manage their own 401k plans. They’re also beginning to question the expertise of their current financial advisors due to this slew of lawsuits taking place in the country.

The large majority—98%—of financial advisors in the United States do not specialize in retirement plans, which means they might not be appropriately qualified to meet employers’ needs and run the plans effectively. Plan sponsors are now realizing that their 401k advisors might not be good enough.

The fears that employers are having over the management of their 401k are pushing many of them to start using, or changing, financial advisors in order to improve plan management and performance as well as reduce legal risks. They’re looking for more knowledgeable advisors who are experts in a variety of areas, including managing fiduciary responsibilities and retirement planning.

Help is on the way

Fortunately, help is on the way for employers who sponsor 401k plans. Beginning in April 2017, the Department of Labor will institute new rules requiring all financial advisors working with 401Ks to serve in a fiduciary capacity. Fiduciary is a legal definition and is the highest standard of care in the industry. In effect, it requires that financial advisors act solely in the interests of the plan participants above everyone else (e.g. the company sponsoring the 401ks, the financial advisor him or herself, etc.) and makes these financial advisors personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. Industry pundits predict that this change in DOL legislation will cause a shake-out in the industry and force advisors who are not 401k specialists and who work with only a few plans to drop this part of their practice.

The Value of a Retirement Plan Advisor Who Is a Specialist and a Fiduciary

Financial advisors who specialize in retirement planning deliver increasingly greater value to employers who are struggling to manage their own 401k plans. These specialized advisors have the industry expertise required to improve plan performance, increase member engagement, and invest appropriately.

Retirement advisors who also stand as a fiduciary for their plans are the ideal advisors. The fiduciary standard is the highest standard of care in the industry. It ensures that the advisor is putting the participant’s interests above their own, that no conflict of interests exists, and that the plan is run in a compliant manner.

The benefits of using a retirement advisor with fiduciary standard are myriad:

Demonstrating Knowledge: These advisors can offer plan members their knowledge across a variety of areas, which can help you and your employees save for retirement. Hiring an advisor that specializes in retirement planning is particularly important in helping employees set clear savings and retirement income goals, redefine success measures, get on track for a comfortable retirement, and more.

Providing Guidance on Plan Design: Many employers are making changes to their plan design to drive participation among their employees. A good retirement advisor can offer adequate recommendations and advice that can allow for the most effective changes.

Providing Guidance on Investment Menu Changes: Employers also occasionally make investment menu changes to their 401k plans, and rely heavily on the investment knowledge of their financial advisors for investment menu selection. They are looking for more effective guidance in this area. The fiduciary standard is especially important in this area. 

Employers who are worried about screwing up your 401k are looking for better financial advisors to help them manage their plans. A retirement advisor with fiduciary standing is the advisor of choice for avoiding legal risks.

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Topics: 401k

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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