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Being a retirement plan sponsor comes with great responsibility—and risk. As a plan sponsor, you have a fiduciary duty to ensure your plan service providers—investment advisors and recordkeepers—are meeting the standards of professional responsibility, as defined by the Employee Retirement Income Security Act (ERISA)—whether or not you know the ins and outs of ERISA or Securities and Exchange (SEC) laws. If you are in an executive or leadership position in your company, the responsibility falls on your shoulders. As such, many plan providers entrust the management of their retirement plan and fiduciary responsibility to an investment advisor. Performing due diligence is a critical and mandatory component of your risk management strategy. As a plan sponsor, you should also implement processes and procedures that ensure you avoid conflicts of interest.
The fact of the matter is, retirement plan administration is only a small portion of the duties and responsibilities you have as a business owner, and staying on top of every detail may be nearly impossible. Regardless, regulators rarely let retirement plan mistakes go unpunished simply because an executive was unaware of conflicts of interest that were occurring on his or her watch. Unlike the SEC, which provides certain relief for conflicts of interest as long as they are disclosed, under ERISA, all conflicts of interest must be eliminated. When performing due diligence and evaluating possible existing conflicts of interest, ask your investment advisor these questions:
1. Do they accept compensation from vendors for:
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Travel costs?
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Meals?
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Entertainment?
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Business Retention?
Accepting indirect compensation like this from vendors could be perceived to influence the judgement of the advisor and would be considered a conflict of interest by regulators. The fiduciary standards under ERISA require that these conflicts of interest be eliminated.
2. Do they solicit participants for other services?
Does the advisor use their existing relationship with your plan participants to solicit other financial services such as life insurance, IRAs, or college savings accounts? This should be viewed as a questionable practice because your employees could interpret this solicitation as your endorsement of the advisor's additional services and/or products. And, should your employee have a bad experience with one of those products or services, it could mean liability for you and your organization.
3. Do they offer managed account solutions?
While managed account solutions may provide additional services or benefits to your plan participants, this may become a conflict of interest if the solutions results in increased fees to your plan providers simply for offering the third-party solution to participants. It's critical that a prudent fiduciary and due diligence process has been followed for all investment decisions.
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