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Who Should You Trust With Your Retirement?


By Charity Yoro

Editorial Policy

Becoming familiar with fiduciary responsibilities is crucial for protecting your retirement plan and ensuring its compliance with the law. Fiduciary duty is the discretion or control exercised over a retirement plan. Each plan must have at least one fiduciary, either a person or an entity, who has control over the operation of the plan. Fiduciary status does not refer simply to a person’s title, rather it’s based on the activities performed for the retirement plan (outlined in greater detail later in this post).

Most times, fiduciary responsibility falls on the trustee, which is often the business owner at a startup or small business (at corporations, the CFO or HR manager). However, ALL individuals who exercise discretion in the administration of the retirement plan, including investment advisers and members of a plan’s administrative committee, also carry fiduciary responsibility.

Because of the complexity that accompanies fiduciary duty, most employers opt to hire outside professionals (third-party service providers) like Human Interest to help manage these duties.

It’s important to know that even hiring someone to perform fiduciary functions is itself a fiduciary act. This means that you are liable for the investment decisions of every person or entity you appoint with fiduciary duty. And you want to hire someone with integrity and honesty.

ERISA and the Fiduciary Standard

Because fiduciaries act on behalf of participants in a retirement plan and their beneficiaries, they are subject to certain standards of conduct. The Employee Retirement Income Security Act of 1974 (ERISA) is the document that sets those standards, and it’s important for both employers and employees to be familiar with it.

Fiduciary responsibilities, as outlined by the Department of Labor (DOL), are to:

  • Act solely in the interest of plan participants and their beneficiaries. Most plan providers are actually NOT fiduciaries, though this is something that the DOL wants to change.

  • Carry out duties prudently. Under ERISA, prudence is one of a fiduciary’s primary responsibilities. It requires possessing (or hiring someone who has) expertise in a variety of areas, including investments.

  • Adhere to plan documents, as long as they are consistent with ERISA’s standards.

  • Diversify plan investments. A fiduciary should consider each investment as part of the retirement plan’s portfolio as a whole, in order to minimize the risk of large losses to a retirement plan.

  • Pay only reasonable plan expenses. Many retirement plan providers charge enormous fees, both hidden and explicitly stated. Make sure to ask very specifically what both employers and employees are paying in asset-based fees and on plan fees.

It’s imperative that employers (and employees) know their fiduciary responsibilities and are familiar with their plan. It’s also crucial to note that fiduciaries cannot simply walk away from their responsibilities. They need to follow plan procedures and ensure that the responsibilities are handled by another fiduciary, in order to properly carry out the plan’s operations.

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Third-Party Service Providers

The unsettling truth is that most plan providers are not fiduciaries. This means that they may receive incentives and/or commission from the funds they recommend to you.

Therefore, it’s crucial that you choose your plan’s service provider wisely. You should feel assured that your financial adviser is qualified, knowledgable, and truly acting in your best interest.

When it comes to selecting a service provider, it’s important to look at the firm’s financial condition and experience, the quality of their services, as well as their business practices (such as how plan assets will be invested).

The Importance of a Fiduciary Duty Mandate

The DOL is attempting to pass a fiduciary duty mandate for all financial advisors of retirement plans on the basis that current regulations aren’t addressing conflicts of interest in this market.

The definition of what constitutes “investment advice” needs to be updated, the DOL argues, as the nature of how Americans prepare for retirement has changed.

According to a 2013 Government Accountability Office (GAO) report, people are not always receiving advice that is “in their best interests” upon changing jobs or retiring. Plan participants aren’t receiving adequate information or assistance from their employers. Also, financial institutions particularly are marketing certain retirement options in a way that can be “misleading.”

There’s a gap here that most employees and employers don’t realize about their retirement plans, and as a result, aren’t demanding this standard from their service providers. But they can and they should.

After all, you should be able to trust the providers who handle your retirement.

Human Interest Advisors, LLC, is a plan fiduciary and SEC-registered investment adviser. Our automated investing service for employees is rooted in decades of academic research and can be found in detail on our website.

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Originally from Hawaii, Charity is currently based in San Francisco. When not traveling the world — which she has been lucky enough to do a lot of — she can be found blogging about packing and living a rich life with less.

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