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What is a 401(k) Fiduciary and Why Does it Matter?

10 MIN READEditorial Policy

Fiduciary sounds like an old term from English law that should be of no concern to modern society. Yet, today an understanding of a fiduciary matters to anyone with a financial advisor or considering using an investment manager or robo-advisor. Even if you simply have a 401(k) plan at work, you need to understand what a fiduciary is and why it matters.

What is a fiduciary?

A fiduciary is someone who is bound by law to put your interests before their own. It sounds kind of like your mom, only without the legal part. No, in all seriousness, if a financial advisor or financial planner is giving you advice and they are a fiduciary, they must put your financial interests ahead of their own. Included in the "fiduciary standard" is an obligation of the financial professional to inform the client of any current or previous disciplinary actions taken against them. The fiduciary must disclose any potential conflicts of interests. Finally, a fiduciary is also obligated to reveal their qualifications, services and how they are paid (this last one is very important!). The important takeaway is that, unfortunately, not all financial advisors and planners are fiduciaries.

How does the fiduciary standard affect you?

Here’s how it might play out in actuality:

Jane, the client, born in 1965, wants to receive a $300 per month annuity payment during her retirement.

Jim, her financial advisor has access to many investment products. Let’s assume that Jim is compensated by commissions on the products he sells to you. Imagine that like Jane, you’re seeking an income stream in retirement and looking for investments that will help you reach that goal. Following are possible investments that Jim might suggest:

Option 1: An annuity product with a $300 payout per month for as long as you live.

Option 2: A REIT (real estate investment trust) ETF with average annual returns of 4.5%.

You’re the customer and have no idea which product would be best for you.

Let’s explore each product individually:

Option 1-The Annuity

According to the Schwab Annuity Investments calculator, for a lump sum payment of $79,083 Jane can receive $300 per month for her entire life. Additionally, the chart below lists several other premium and payout options.

Schwab Sample Annuity Product

Premium payments and payout options under certain conditions


How much will this annuity product cost? Schwab or the seller of an annuity gets paid a commission, in addition to the premium payment, when you purchase the annuity. It’s your responsibility to ask the financial professional the exact amount of the commission as well as any annual fees that you’ll pay. We don’t know Schwab’s commission, but Stan at claims, “It’s also important to understand that annuity commissions can range from 1% to over 10%, depending on the product.” The annuity product may or may not be the right product for Jane.

Option 2-The REIT ETF

If Jane invested in a REIT ETF paying 4.5% average annual returns, she’d need to invest approximately $63,000 in order to receive income equivalent to $300 per month for a total of 35 years.’s Real Estate Investment Trust (REIT) Category Data

REIT category data


Jane would pay approximately a $10 commission to buy this sample REIT investment in addition to the $63,000 price of the actual REIT ETF shares. According to, the REIT investment would charge an annual management fee in the range of 0.45%. (We selected the average management fee for all of the REIT ETFs in this example.)

If Jim, the advisor wasn’t bound by a fiduciary standard, he might be tempted to choose the investment choice that was best for him; possibly, the higher commission annuity. Whereas, if Jim were bound by the fiduciary standard, he would need to evaluate both investments according to the needs of Jane, and choose the best investment for her.

And that is why it’s important to understand what a fiduciary is. Without a financial advisor, bound by the fiduciary standard, Jane risks being advised to purchase an investment product that best suits the advisor and not the best investment for her own needs.

Employers: For happy employees, use low fee index funds in your 401(k)>>>

Fiduciary updates in 2017 and beyond

In April 2016, the U.S. Department of Labor (DOL) issued a rule requiring all financial advisors who handle retirement accounts to serve as fiduciaries. This means that financial advisors must put the needs of their clients before their own. The new "fiduciary rule" would apply to retirement accounts; IRAs, 401(k)s, 403(b)s etc. If your IRA is at a brokerage account, the financial professional servicing your account would be required to suggest investment products that best serve your needs, shunning higher commission products for comparable low fee alternatives.

This DOL fiduciary rule was set to go into effect in April 2017, until President Trump signed an executive order pausing the implementation of the rule and requesting further review. According to a recent New York Times article, there’s now a possibility that the entire fiduciary rule will be abandoned. Gary Cohn, former Goldman Sachs official now the head of the National Economic Council, told the Wall Street Journal, he wanted to eliminate the rule. His comments led to further speculation that the rule would be eliminated.

The administration’s problem with the proposed fiduciary rule included the possibility that some investors might actually pay more for financial advice under a fee-based system than the prior commission-based approach. Other objectives included giving the consumer the opportunity to choose how they wished to invest, instead of legislating their choices. Cohn likened the Fiduciary Rule to outlawing unhealthy, but tasty foods. The lack of a Fiduciary Rule is akin to allowing customers to choose fatty, sugary foods, even though their less optimal food choice might cause heart disease or shorten their lifespan.

Even if the fiduciary rule is abandoned, it doesn’t mean that financial professionals will automatically disregard the interest of their clientele, in lieu of lining their own pockets. Many of the largest investment brokerage firms have already implemented adjustments in how their brokers are compensated and have moved from a commission-based compensation model to a more equitable fee-based approach.

Recent updates: What the 2017 Fiduciary Rule Executive Order Means for Small Business 401(k) Plans

Why understanding the fiduciary standard matters for 401(k)s

Whether the fiduciary rule becomes law or not, the consumer who performs his or her due diligence will likely end up with superior investments and ultimately, more money to spend in retirement. It is your responsibility to question your financial professional to find out if she’s a fiduciary. Additionally, understand the fees you pay for a particular investment. Learn about the style of the investment product and ask what makes this the best product for you.

When it comes to retirement investing, you’re better off paying lower fees so that more of your investment dollars are working to grow your wealth. Make sure that your investment professional follows the fiduciary rule. The fiduciary standard helps ensure that you’re putting your money into products that will grow your wealth for the future, not the wealth of your financial professional.

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If you want to set up or switch to an a 401(k) that's great for employees and employers, let your company know about Human Interest.

Veteran portfolio manager, expert investor, and former university finance instructor. She has authored 3 money/investing books. Friedberg also owns the financial websites and

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