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

October 13, 2016 by Esther Kim

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. Use this checklist to find out if your 401(k) plan is prepared to meet the new rule.

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. One of our retirement plan consultants can help you determine whether your advisor is a broker, and not a fiduciary on the plan. Schedule time to chat!

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.

We’ve compiled a simple checklist to help you evaluate whether your advisor is a 401(k) fiduciary or a broker, an important step in determining how prepared you are to meeting the new Department of Labor Fiduciary Rule. (Here’s more on what an employee fiduciary should look like.)

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. Broker

Series 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.

 

 

FEE STRUCTURE

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. Broker

Fee-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: 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”.

Schedule time to chat with one of our retirement plan consultants. All ForUsAll 401(k) retirement plan consultants are Series 65 licensed and investment advisor representatives. ForUsAll offers 3(38) services and is a registered investment advisor with the SEC.

 

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Esther Kim

Esther Kim

Esther brings a wealth of industry and marketing experience to ForUsAll. She’s spent four and a half years as a marketing leader in fintech companies, with a focus on 401(k) solutions. Esther got her start at Qualcomm, honing her corporate communications chops serving the executive team within Government Affairs. She's rolled up her sleeves to build marketing and customer success teams at Lever and SigFig. Esther joined ForUsAll after serving with the founding team at Financial Engines. Esther earned her BA in Psychology from the University of California, San Diego. In her free time, Esther is learning French, loves to be outdoors, and is an avid Korean dumpling maker.
Esther Kim

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