Go beyond a basic 401(k)

Go beyond a basic 401(k)

Give your employees more than just a 401(k), join the movement.

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5 min read

Did you hire a 401(k) fiduciary or a broker?

Esther Kim
October 13, 2016
Did you hire a 401(k) fiduciary or a broker?
Table of contents

Update: The Department of Labor adopted a rule mandating all 401(k) advisors now put their clients interests ahead of their own. The Department of Labor Fiduciary Rule will go into effect in 2017.

If you already have a suspicion that your 401(k) advisor is not a fiduciary, and instead is simply a broker, my suggestion is to take steps and confirm this suspicion. If they are a broker, there’s a good chance that your plan already contains funds that are driving commissions from your employees’ 401(k) plans and putting money into the broker’s pocket.

Gut Check: Find out where your 401(k) advisor falls in the fiduciary spectrum.

Knowing whether your 401(k) advisor is actually an advisor or simply a broker commissioned to sell investment (or insurance) products will help you decide whether your advisor is truly acting in your best interest.

If you already know the specifics about your 401(k) advisor, here’s how a 401(k) fiduciary and broker compare:

SEC LICENSE

Knowing which licenses your 401(k) advisor holds is a good clue on whether or not they’re taking fiduciary responsibility for the investments in the plan.

## Fiduciary vs. BrokerSeries 65 License: Good sign that your advisor may be a fiduciary. Series 65 is a license that allows a person to legally act as an investment advisor representative. They are held to a higher standard of care called fiduciary duty, and provide advice to meet the client’s objectives first.Series 7 License: Possible red flag that your 401(k) advisor is a broker and may not be a fiduciary. Series 7 is a securities license and is typically held by stockbrokers as it gives them a license to trade/sell securities and receive fees for the sale.

Evaluating 401(K) providers? Download our insider checklist now.

How an advisor charges their fees will help you discover whether you’re being charged for just their services, or if they’re also taking commissions from the funds they recommend.

## Fiduciary vs. BrokerFee-Only: Advisors who are “fee-only” are fiduciaries. They’re held to a higher legal standard for their work. They don’t accept commissions, and their fees are charged for advice and investment management — they don’t receive fees from investment products and securities they sell.Fee-Based: Clear sign that your 401(k) advisor is actually a broker. Being “fee-based” opens the door for them to accept commissions on funds they put into your plan.

ERISA INVESTMENT FIDUCIARIES

The Department of Labor designates certain advisors as investment fiduciaries if they meet certain standards under the Employee Retirement Income Security Act of 1974 (ERISA). If they fulfill these responsibilities (and take on the liability for this work), then the advisor will tell you they are a specific ERISA investment fiduciary.

## Fiduciary vs. Broker[3(38) fiduciary](https://www.forusall.com/3-38-fiduciary/): Congratulations, your 401(k) advisor is a fiduciary and they are taking on the fiduciary responsibilities on the plan investments. Also, rest assured that your 401(k) advisor is likely complying with the new Department of Labor Fiduciary Rule.

3(21) fiduciary: If your 401(k) advisor providers your company with 3(21) services, then this is a good sign they are not a broker. This means your 401(k) advisor (a.k.a. employee fiduciary) is there to officially make investment recommendations on your plan. However, you do share the fiduciary responsibilities so you’re still holding the fiduciary responsibility on the 401(k) plan investment selections.

No ERISA fiduciary standard met: Red flag if your 401(k) advisor is not any kind of ERISA investment fiduciary. Be aware of the products they sell you and find out if they are already taking commissions from the funds in your plan.

If you want to figure this out yourself, use our checklist and guide to get a clear answer on whether your advisor is a fiduciary or a broker. Or talk to one of our retirement plan consultants, as a 3(38) fiduciary and with each of our investment advisor representatives Series 65 licensed, we’re pretty good at quickly identifying whether someone is a 401(k) fiduciary or a broker.

Dive Deeper

Step 1. Send this checklist to your 401(k) advisor to complete and return to you. (These questions should require minimal to no research on your advisor’s part so you can reasonably expect it to be returned in one business day.)

Step 2. Compare your 401(k) advisor’s answers to the answer key below.

Step 3. Take necessary steps if you find your 401(k) advisor is not a fiduciary and not legally required to act in your best interest on your 401(k) plan.

Decipher your advisor’s answers

Question 1: Series 7 is a securities license and is typically held by stockbrokers as it gives them a license to trade/sell securities. Having this license signals the advisor is actually a stockbroker and not necessarily a fiduciary on the plan. **A “yes” answer to this question is a possible red flag. **

Question 2: Series 65 is an investment advisor representative license and allows a person to legally act as an investment advisor representative. The investment advisor representative is held to a higher standard of care called fiduciary duty, and provides advice to meet the client’s objectives first.

Question 3: If your 401(k) advisor has no legal obligation to put your best interests ahead of theirs, then this is a giant red flag as it is goes to the crux of the Department of Labor Fiduciary Rule. If your advisor has mentioned the Best Interest Contract Exemption (BICE), be particularly wary and consult a professional before signing anything. This document will allow your 401(k) advisor to continue to receive commissions. Another red flag.

Question 4: If your advisor answers yes, then congratulations — you’re on track to having an advisor that will comply (and is likely already complying) with the fiduciary rule, and is acting in your best interest.

Question 5: If your 401(k) advisor provides your company with 3(21) services, then this is a very good sign. This means your 401(k) advisor is there to officially make investment recommendations for your plan. However, you do share the fiduciary responsibilities, so you’re still holding the fiduciary responsibility on the 401(k) plan investment selections.

Question 6: Ultimately, if you want to let go of fiduciary responsibilities for the plan investments and also rest assured that your 401(k) advisor is likely complying with the new Department of Labor Fiduciary Rule, then you want your advisor to say, “Yes! I am a 3(38) fiduciary.”

Question 7: If your account is a brokerage account then this is a pretty good sign that your 401(k) advisor is not a fiduciary, likely a broker, and may be filling your plan with securities that they take commissions from. Red flag.

Question 8: Fee-only advisers = fiduciaries. They don’t accept commissions, and their fees are charged for advice and investment management — they don’t receive fees from investment products and securities they sell. Brokers, on the other hand, or if your advisor says they’re “fee-based” then they can accept commissions on funds they’ve put into your plan. Fee-based advisors are a red flag.

Question 9 and 10: Giant red flags if your advisor answers yes to either (and especially both) of these questions. It means your advisor is not incentivized to always act in your best interest, but instead to put their own interests first. This also means that if their current practice continues, they will be in direct violation of the Department of Labor Fiduciary Rule when it goes into effect next year. Also be wary of any conversations your advisor brings up to have you sign the Best Interest Contract Exemption, which means you’re agreeing to allow the advisor to continue to receive commissions.

Question 11: Having an insurance license may or may not be a red flag, but it’s something to dive deeper into. This turns into an immediate red flag if your advisor has an insurance license, is not a fiduciary, and accepts commissions. Insurance products can have giant commissions embedded into them and hold significant conflicts of interest.

Question 12: If your advisor answers yes to just the broker question or answers yes to being both an advisor AND a broker, then watch out — red flag here. Your 401(k) “advisor” has now disclosed that they may be helping you out not necessarily for your benefit, and the benefit of your employees, but for the commission they’ll potentially make off of the investments in your plan. Be particularly wary of the advisor that answers yes to both, this means they’re a dual registrant, may be incentivized to put commission-driven funds into your plan, and held to a lower legal standard than a pure registered investment advisor when it comes to acting in your best interest.

If any of these questions triggered a red flag, you may want to consult a 401(k) fiduciary — someone with a 3(38) designation would fit the bill — to determine the risks you’re carrying on your plan. And to learn which funds in the plan have commissions and ultimately learn how much you’ve truly been paying your 401(k) “advisor”.

Go beyond a basic 401(k)
Give your employees more than just a 401(k), join the movement.
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Esther Kim
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This material has been prepared for informational and educational purposes only and should not be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”)  to activate a cryptocurrency window or invest in crypto.  Investing in crypto can be risky and investors must be able to afford to lose their entire investment.  You should consult with your own advisers before activating a cryptocurrency window or investing in crypto.  ForUsAll does not provide legal, tax, or accounting advice. Please refer to your Plan's fee disclosure for more details.© 2023 ForUsAll, Inc. All rights reserved.
1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.
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