One of the most damaging fiduciary breaches that normally goes unnoticed ...

One of the most damaging fiduciary breaches that I witnessed over my career in the retirement plan industry was advisors recommending to the 401k plan sponsor decision makers to terminate their plan and instead roll plan assets into individual products for each participant.  

I am not referring to extremely small 401k plans where a company may have shrunk, and a 401k is no longer a fit.  I'm referring to larger plans, where 401k is clearly the right fit.

What’s the logic an advisor would use to convince the decision makers of a 401k to do this?  

Normally, they promote three reasons, none of which are accurate:

1.  Creating fear with the plan sponsor and decision-makers - promoting the idea that their fiduciary responsibility & personal liability of a 401k plan is too high, too risky, and not worth the risk.  

2.  More customization - Individual investment products offer more personalized for each employee & a better fit.

3.  Cost effective - the cost of a 401k plan was too high and it’s better to have the employee pay for their own plan.

All 3 of these three points are wrong, misrepresented and big disservice to plan sponsors and plan participants. Plus, this is a Fiduciary breach.

Responding to each of these 3 reasons:

1.  Fiduciary responsibility can easily be managed and mitigated.  

2.  If a 401k is properly built, it allows plenty of personalization for each individual employee.

3.  Lowering the cost is just incorrect.  Logic would say that a group program, like a 401k,  covering multiple people & a larger pool of assets would be more cost-effective than an individual program covering just one person. That logic is correct – if properly built, 401k plans are more cost-effective than individual products.

What's the real driver of this recommendation to terminate the plan?  

Unfortunately, the answer is individual products generate more revenue and compensation for the advisor and their firm. Depending on the individual product used, sometimes there can be significant payouts to an advisor who terminates a 401k plan.  

In addition, these decisions can be driven by helping an advisor qualify for trips, promotions & accolades within the advisor community or their region, which are normally based on revenue at the broker/dealer level & GDC (Gross Dealer Concession). Unfortunately, this is clearly a conflict of interest & a fiduciary breach, but I saw this happen too many times. I would find out about it after the fact, which was too late to reverse it.       

If an advisor is not acting as a fiduciary and instead following suitability rules, rolling all the plan participants into individual products could be considered suitable. However, it’s still not the best option for the participants or plan sponsor.

“A big heart and an empty head are not a legitimate excuse.”

If a plan is set up poorly, it could be too expensive, but the best option would be to fix the plan, not terminate it.

An analogy - if your car doesn’t work, do you bring it out in the backyard, toss some dynamite in and blow it up? Then start riding your bike or horse to work, or do you fix the car? Fix the car! The car is a highly effective invention & vehicle – don’t destroy it, fix it. Put some new tires on it, give it a tune-up and some body work, and get it humming again! 

Matt Ward - June 19, 2023