Sponsoring a retirement plan is a big undertaking, and not just because of the amount of work involved. With it comes legal liability in the form of a fiduciary duty. If you sponsor a retirement plan, it is your fiduciary duty to act in the best interest of plan participants and follow all laws and regulations. If you don’t, there can be serious consequences. Many plan sponsors fail to fulfill their fiduciary duty not out of malice, but out of ignorance. They make assumptions and end up in trouble. To save you from the same fate, here are 5 common fiduciary assumptions that can be dangerous because they are not true:
1. All Target Date Funds Are Identical
Though their names may make them all look the same, all target date funds (TDFs) are not equal. Each has different fees, expenses, underlying investments (active/passive), performance, and glide path, which is when they hit their most conservative point.
Based on your plan participants’ needs, each of these factors could make a difference in a fund’s appropriateness for your plan. Instead of assuming that all TDFs are the same, you should consider working with a retirement plan advisor who understands their intricacies in order to select the best ones for your unique plan.
2. The Lowest Cost Investment Is The Best Choice
Cost is important when choosing investments for your plan, but it shouldn’t be the only factor in your decision. You should look for the lowest cost best performing investments, not just the cheapest.
Why? Returns are comprised of both cost and performance. It’s a balance. An investment with stellar performance can make up for higher fees, just as a poorly performing investment can erase the benefit of having low fees. A knowledgeable retirement plan advisor can help you weigh your different options and choose the best combination of performance and affordable fees.
3. An Investment Policy Statement Mitigates My Fiduciary Duty
It is a good idea for your retirement plan to have an Investment Policy Statement (IPS). It is a helpful tool in making investment decisions and the guidelines help you to fulfill your fiduciary duty. It, however, does not mitigate your fiduciary duty, it only helps you fulfill it.
If you have an IPS and don’t follow it, though, that could be worse than not having one at all. Not following your IPS is not acting in the best interest of your plan participants and is, therefore, a breach of your fiduciary duty.
4. I Can Delegate All Of My Fiduciary Duty
Many plan sponsors think that by delegating the various fiduciary duties accompanying a retirement plan they can eliminate their own liability. While you can delegate some of your liability, you cannot delegate all of it.
The simple act of delegating is a fiduciary responsibility. Poor delegation or not monitoring those you delegate to can be a breach of fiduciary duty. If your retirement plan advisor doesn’t fulfill their fiduciary duty, you will violate your fiduciary duty if you ignore it and fail to take appropriate remedial action.
5. Plan Participants Understand Their Investment Choices
It is dangerous to make assumptions regarding the level of knowledge of your plan participants. Many people have received no formal financial education and cannot be expected to understand different investment choices or how they work.
One of your responsibilities as a plan sponsor is to educate your employees so that they understand the differences between their options and can make wise choices. It may help to partner with a retirement plan advisor to educate your plan participants and help them make better decisions.
It is a big responsibility to sponsor a retirement plan. There is a lot you need to know and making assumptions can get you into trouble. It can help to work with an experienced retirement plan advisor who can answer your questions and make sure your plan is ERISA-compliant. If you would like to speak with a knowledgeable advisor about your plan, call our office at (949) 718-1600 or email us at info@beaconpointe.com.
Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.
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