You’ve probably heard the term “fiduciary,” but what is a fiduciary advisor? Should your company work with one for your 401(k) plan? And are all advisors fiduciaries?
Generally, a fiduciary is an individual or organization with decision-making responsibility over a 401(k) plan and is legally obligated to act in the best interest of the plan participants. Fiduciary responsibility can affect individuals within a company at a personal level. And to answer our earlier question, no, not all financial advisors are fiduciaries, meaning they are not held to a standard of prioritizing their clients’ best interests.
Unfortunately, many employers don’t understand the fiduciary role, which means they are unaware of their responsibilities and potential liability. Failing to understand your fiduciary duties could negatively impact both your company and your team.
Read on to discover the importance of partnering with a fiduciary financial advisor, as well as your fiduciary responsibility as a plan sponsor.
What Employers Need to Know About Fiduciary Responsibility
A fiduciary can refer to someone both within a company and external to the company (e.g., a financial advisor can be a fiduciary on a 401(k) plan).
Who Has Fiduciary Responsibility in a 401(k) Plan?
A person within a company can be named a fiduciary, meaning they have knowingly taken on that responsibility and accept it by assignment. This can include the plan sponsor (i.e., employer) and committee members. Someone can also become a fiduciary by action—meaning they aren’t necessarily assigned as a fiduciary, but if they take on an important decision-making role within the 401(k) plan, they can knowingly or unknowingly become a fiduciary.
If a financial advisor has obtained the proper designations they can also serve as a fiduciary on a company’s 401(k) plan. Not only are they legally required to conduct extensive due diligence to provide the best options for your company and plan participants, but they can also provide specific investment advice to your employees. A non-fiduciary advisor can only give “guidance.”
What Does a Fiduciary Actually Do?
First and foremost, the fiduciary standard dictates that an individual or organization must act solely in the best interest of plan participants by ensuring investment options, fee structures, and plan design align with employees’ financial goals. A fiduciary advisor provides objective advice tailored to participants' specific circumstances, including age, risk tolerance, and timeline.
On a similar note, they are responsible for developing and following a documented, prudent process. This includes maintaining written documentation of how key decisions are made (e.g., selecting or replacing funds, reviewing fees, and hiring plan providers).
In fact, fiduciaries must monitor the 401(k) plan fees and investment options. Benchmarking fees ensures they’re reasonable compared to similar plans, while monitoring and comparing investment options and service providers ensures they meet these standards.
Fiduciary advisors specifically are required to disclose their fees, compensation structures, and potential conflicts of interest. This mitigates hidden costs or surprises, ensuring employees are not burdened with unnecessary or excessive costs.
Finally, fiduciaries must ensure the plan complies with the Employee Retirement Income Security Act of 1974 (ERISA) and Department of Labor (DOL) standards. All of the above helps employers maintain compliance and minimize the risk of legal challenges related to undisclosed expenses and improper plan administration.
Why Hiring a Fiduciary Advisor Makes a Difference
When you choose a 401(k) advisor who is a fiduciary, they help protect your company and employees by:
- Sharing responsibility and reducing your liability, as a co-fiduciary takes on some of the legal risk
- Strengthening the plan process by bringing structure, documentation, and expertise to decision-making
- Supporting ongoing compliance by keeping the plan aligned with evolving regulations and best practices—which can be tough to keep up with while running your business
- Adding clarity and confidence, knowing your plan is being handled with care and precision
The Risks of Not Understanding Fiduciary Responsibility
Fiduciary responsibility supersedes any other considerations when making plan-level decisions. Fiduciaries can be held personally responsible if the plan is mismanaged or participants are harmed due to poor oversight, which may result in lawsuits or regulatory penalties.
This misconception that fiduciary status only applies to named roles means someone may not be aware of their fiduciary responsibilities. This can cause key tasks, such as monitoring fees, reviewing investments, or documenting decisions, to fall through the cracks. This can put the plan and its participants at risk.
When fiduciaries fail to understand their responsibilities, it can also lead to noncompliance with DOL and ERISA requirements and trigger audits, fines, or enforcement actions. The legal and financial risks to the company and individual decision-makers of these 401(k) misunderstandings and mistakes are serious—and simply not worth it.
How FSRP Supports Employers as a Fiduciary Partner
FSRP aims to bring clarity to this area by focusing on both plan performance and employer protection. We spend significant time and effort educating our clients on the role of a fiduciary, how to do it well, and how to protect themselves.
By serving as a co-fiduciary on our clients’ 401(k) plans, we help them develop and document their decision-making processes. This shared responsibility arrangement enables us to protect both ourselves and the client.
Attempting to manage all of these responsibilitieson your own is simply not worth the legal or financial risk to your business or your employees. After all, it’s challenging to stay on top of the responsibilities and constant regulatory changes.
Hiring a fiduciary advisor gives your company confidence, clarity, and protection. It will also strengthen your employees’ trust in the plan, which can help boost participation rates, retirement savings, and overall satisfaction and morale. Contact FSRP today to learn how we can help you meet your fiduciary responsibility.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Financial Strategies Retirement Partners (FSRP) is a Registered Investment Adviser. Financial planning services offered by FSRP are separate and unrelated to Commonwealth.