401(k) Plans

The Problem Retirement Plan Fiduciaries Face

Fiduciaries of employee retirement plans such as 401(k) plans can place their own personal net worth at risk if they fail to fulfill their duties prudently. This personal liability can attach to fiduciaries for investment mistakes they make and investment mistakes made by plan participants.

Some Ramifications of the Problem

Fiduciaries of employee retirement plans would naturally like to eliminate, or at least reduce, their personal exposure to liability. In fact, the Employee Retirement Income Security Act (ERISA) allows fiduciaries the opportunity to transfer that liability to the investment advisors for their plans.

But these advisors - including many investment advisors to 401(k) plans - have no interest in helping fiduciaries reduce their liability. Helping fiduciaries in this way would mean that the advisors themselves would have to assume liability. That’s why many advisors avoid a fiduciary standard of conduct when advising plan fiduciaries and substitute an inferior salesperson standard of conduct.

Investment advisors to retirement plans that adhere to a salesperson standard give plan fiduciaries a false sense of security. Fiduciaries are led to believe that the advisors will “take care of everything,” including satisfying the fiduciaries’ own duties to their plan participants.

Unfortunately, many investment advisors that adhere to a salesperson standard don’t really take care of anything. They aren’t required to since the standard they follow won’t allow them to have a fiduciary relationship with plan participants. Investment advisors adhering to a salesperson standard therefore owe no fiduciary duties to participants.

One result of this is that when plan participants file lawsuits against plan fiduciaries, the fiduciaries are left to face liability all alone because their advisors (who adhere to a salesperson standard) aren’t held to the same rigorous standard (a fiduciary standard) as are the fiduciaries.

How to Resolve the Problem

Sponsors and fiduciaries of retirement plans, personally responsible for the prudent selection and monitoring of plan investment options, can transfer their personal exposure to that liability to Prudent Investor Advisors, LLC. We accept that risk by acknowledging in writing – in accordance with ERISA – our status as an ERISA-defined “investment manager” and independent fiduciary to sponsors and fiduciaries of the retirement plans we advise.

Transferring the risk for selecting and monitoring plan investment options from the fiduciaries of a 401(k) plan to us helps align the interests of all parties that have an interest in the plan. When we sit on the same side of the table as the plan fiduciaries, conflicts of interest disappear. This can increase the chances that plan fiduciaries will prudently discharge their duties solely in the interests of the plan’s participants and their beneficiaries - as they are required to do by ERISA.

Benefits of Resolving the Problem

Among the most important duties of fiduciaries of 401(k) plans are the duties to diversify the risk of plan investment options and control plan costs. By minimizing the risks and costs of the retirement plans for which they are legally responsible, fiduciaries can further significantly reduce their personal exposure to liability.

The best way for fiduciaries to fulfill their duties of diversification and cost control, we believe, is to offer plan participants a prudent range of low cost, broadly diversified and automatically rebalanced investment options comprised of model portfolios of passively managed institutional asset class mutual funds. (Principles of modern prudent fiduciary investing suggest that passive investing is the “default standard” for fiduciaries.)

Our investment options, created in accordance with leading academic research, are inherently balanced portfolios designed to be both prudent and diversified. Plan participants have the choice of selecting from any one of the model portfolios which have different risk/return ratios ranging from conservative to aggressive.

The prudent range of 401(k) plan investment options we offer allows fiduciaries to more readily comply with their duties, including the duties to diversify plan investment options (both “vertically” and “horizontally”) and control plan costs. This helps them reduce their personal exposure to liability. Our model portfolios also make it easy for plan participants who invest in them to make prudent investment selections since each balanced portfolio is designed to be implicitly prudent and diversified. In short, the model portfolios in our 401(k) plans let plan fiduciaries minimize risk and plan participants maximize wealth.

We believe that our range of prudent and diversified 401(k) investment options also offers plan fiduciaries an independent way of complying with the requirements of ERISA section 404(c).

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