How Union Financial solves the 3 Common Problems with company-sponsored 401k Plans:
Cost
Most 401k plans are too expensive, which reduces the investment return that employees experience in their plans. As a result, they often see their 401k plan as a "bad" investment when compared with non-retirement investment options. This discourages participation, limits employees' ability to reach their financial goals and can chip away at feelings of safety and company loyalty.
Diversification
Even when the Fund Line-up adequately includes all asset classes, most plan participants fail to adequately diversify their portfolios. It is clear that providing a Fund List is not enough. 401k investment plans generally lack both the tools and the methodology necessary for participants to create adequately diversified portfolios. The result is an overall 2% loss in average return, year after year.
Advice
Generic employee education does not provide an individual roadmap to invest appropriately for an employee's retirement. 401k plan participants seek personal financial advice. They benefit from professional investment advice because a) they are more likely to have a properly diversified portfolio, b) they have someone they can talk to about their financial concerns, and c) the resulting confidence generally overcomes emotional investor behavior that can cause catastrophic market timing decisions. Employees having access to investment advice are more likely to stay on track through market ups and downs.
Union Financial partners designs 401k Plans that address the important issues of cost, diversification and the need for advice. Employees can develop feelings of deep loyalty and commitment through individual, one-on-one counseling and an effective 401k savings program.
Your 401k plan can be designed with the ultimate goal in mind.
What's the Big, Fat Hairy Secret Your Broker May Be Hiding From You? Permanently Solve The Confusion About Your True Definition, Legal Responsibilities and Liability As A Fiduciary:
- What are the laws regarding Fiduciary agreement?
- What is an investment advisor?
- When is a planned sponsor not a Fiduciary?
- Has the financial crisis lead to a better financial oversight?
- How can a plan Fiduciary protect themselves from financial liability?
Get the FACTS right now. Review Union Financials (ROR) Rate of Return on the Millions of Dollars we currently manage and get a personalized financial plan to quickly and easily create protected family trusts, tax strategies, academic financing and a strategic retirement plan. Get it NOW!
The search for a skilled investment professional to manage 401k plan assets is one of the most important tasks an employer can undertake. Inevitably, you will bump up against the F-Word: Fiduciary. If you are going to hire the right adviser, you need to understand the implications of this word.
Laws governing fiduciary behaviors and responsibilities with respect to investment advice for a 401k plan are generally contained in the Department of Labor's ERISA law. However, there are other significant and overarching laws that govern individuals working in the financial industry as "advisers" that also have a bearing on 401k advisers. The behavior of Registered Investment Advisers -RIA's- is described in the Invest Advisors Act of 1940 and regulated by the SEC. The ethical duties and responsibilities of Brokers are found in the 1938 Maloney Act that created the NASD (now FINRA). The responsibilities of Trustees are articulated in the Restatement of Trusts or Prudent Man Rule of the Uniform Principal and Income Act (UPIA). Below is a summary.
| Profession | Laws Governing | Regulatory Body | Standard | License/Registration |
| Registered | Investment Advisors | SEC/DOL | Fiduciary | SEC or State IA |
| Investment Advisor | Act of 1940/ERISA | FINRA | Standard | Series 7 |
| (RIA) | Section 3(38)* | (formerly NASD) | Suitability/ | License to sell |
| Broker (Registered | Maloney Act 1938/ | DOL | Disclosure | securities |
| Representative) | ERISA Section 3(21)** | Restatement | Standard | |
| Trustee (for | Exempt from | of Trusts | Fiduciary | Exempt from |
| example at a bank) | Registration | (RUPIA) | Standard | Registration |
An RIA under the 1940 Act is held to a fiduciary standard. The fiduciary is held to the highest standard and requires that the adviser put the needs of the client first at all times. A Broker, licensed by FINRA to sell securities, is held to a lower standard generally referred to as 'Suitability' or 'Disclosure.' The suitability standard is a condition that the security for sale must be suitable to the overall financial circumstances of the buyer. The disclosure standard is a set of rules telling the broker to disclose their compensation along with the attendant conflicts of interest. At the crux of the significant confusion surrounding fiduciary status in the business of offering financial advice is the insistence of Brokers to use the title 'financial adviser' or 'investment adviser,' titles previously reserved for Registered Investment Advisers.
Brokers are specifically exempt from registration under the 1940 Act with the understanding that the primary business of a broker remains offering securities for sale to the public and the actual rendering of 'financial advice' remains incidental to that profession. If a broker does offer advice more than incidental to the business of selling securities, and wants to use the title 'financial advisor' then that individual should be required to meet the fiduciary standard of a Registered Investment Adviser. But can a broker be a fiduciary and put the needs of the client first when their compensation comes directly from the sale or representation of securities and financial products? One ought not to be able to claim exemption from registration (if investment advice is incidental) and also hold oneself out to the public as an Investment Adviser (if selling securities). Yet the industry remains unchallenged in this regard and the distinction in the eyes of the public is virtually nonexistent.
In the ERISA realm, the difference between a Section 3(38) advisor and Section 3(21) advisor is similarly confused. ERISA provides that a plan sponsor can delegate the significant responsibility (and therefore significant liability) for the investment management functions of the plan to a Section 3(38) Fiduciary. An ERISA 3(38) fiduciary has 'discretion' that makes it a decision-maker. An ERISA 3(38) fiduciary decides what investment options such as stand-alone mutual funds or model portfolios should be placed on a plan's menu, whether to remove them from the menu, and, if it does remove them, what investment options will replace them. This is appropriate since the investment advisor usually has more knowledge and experience in the securities market than the individual at the company charged with managing the 401k plan. While the investment decision-making process will be explained to the plan sponsor, the ultimate responsibility for the decision rests with the investment advisor. If the advisor has the discretion to make the decision, the advisor is responsible for the decision, not the person who appointed the advisor. This gives the plan sponsor significantly reduced exposure to fiduciary risk.
By contrast, the Section 3(21) fiduciary is not actually a fiduciary at all - hence the confusion! An advisor, even if named as a fiduciary in an investment advisory agreement between the plan sponsor and the advisor, may not actually be a fiduciary. In determining fiduciary responsibility, ERISA looks at actions not words. An ERISA 3(21) advisor who is responsible for 'recommending,' 'assisting,' 'helping,' or 'advising,' the sponsor as the sponsor makes the discretionary decision to offer or replace various investments, is most conveniently able to hide behind their role when fiduciary blame starts flying. An ERISA Section 3(21) fiduciary makes recommendations, not decisions. Thus, the plan sponsor is not relieved of fiduciary risk. And, the decision making responsibility rests with a professional who is not generally an expert in the investment field.
Since the financial crisis of 2008-9, much political fallout has centered around the semantics and substance of who and what is an investment fiduciary. Many people have been pushing for a universal standard of fiduciary duty because investors are generally unaware that investment advisers and brokers currently operate under different standards. Others wish to continue with a vague ongoing type of two-tiered system. The Dodd-Frank Financial Reform bill, Section 913(g) mandates that the SEC promulgate rules to provide the "The standard of conduct for all brokers, dealers and investment advisers, when providing personalized investment advice about securities to retail customers, shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, or investment adviser providing the advice." The Dodd-Frank law states, however, that charging a commission and selling proprietary products are not necessarily violations of fiduciary duty. It also says that brokers would not have a continuing obligation of care after selling a financial product. That does not seem consistent with a fiduciary standard for all advisors.
Meanwhile, the DOL is working with the SEC to "harmonize both agencies statues" regarding who is a fiduciary when giving investment advice. But the SEC is unlikely to resolve its own lack of harmony among regulations that currently govern RIAs and brokers.
One impact of the new regulations, changes to ERISA Section 408(b)(2), will require service providers to spell out to plan sponsors their fiduciary status, detail the services that they provide, and disclose compensation. The planned effective date for this law is January 1, 2012. Brokers will have a hard time with this as they have established many complex and varying compensation arrangements. Though the law won't specifically require brokers to state that they are not acting as fiduciaries, many of them have already inserted clauses spelling it out to protect themselves in the event of litigation.
While government and industry slug it out over new laws, regulations and the implementation of any enacted changes, plan sponsors must continue working to offer exceptional 401k plans to their employees. In my opinion, the questions that should be asked of any investment adviser or prospective investment adviser to a plan is: Are you a Registered Investment Advisor under the 1940 Act? Are you going to state in writing that you are an ERISA 3(38) fiduciary? If the answer is no, move on to someone who answers 'yes.'
*or 3(21) full scope also a fiduciary
**limited scope - not an actual fiduciary
