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A Guide to Choosing Your Fiduciary Advisor

In recent years, investor advocates have become more concerned about establishing best practices when it comes to retirement plan services and advice. Consumer protection and education has been addressed by these advocates and new proposed changes and clarifications are in motion. This year, the Securities and Exchange Commission (SEC) has formally proposed a guideline which outlines the responsibilities of financial advisors and those acting in a fiduciary capacity, including retirement plan sponsors. This Standard of Care & Best Interest proposal is a common-sense approach to managing the intrinsically complicated financial planning industry.

If you are acting as the Retirement Plan Sponsor for your company, you need to carefully consider the duties applied to you and your chosen financial advisor. Your retirement plan fund lineup and the recommendations made to each of your employees must be “in their best interest.” So, how does the SEC define, “best interest”? Its proposed “Best Interest Standard” details these ground rules:

A broker-dealer making a recommendation to a retail customer would have a  duty to act in the best interest of the retail customer at the time the recommendation is made, without putting the financial or other interest of the broker-dealer ahead of the retail customer.

A broker-dealer would discharge this duty by complying with each of three specific obligations:

•   Disclosure obligation: disclose to the retail customer the key facts about the relationship, including material conflicts of interest.
•   Care obligation: exercise reasonable diligence, care, skill, and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest.
•   Conflict of interest obligation: establish, maintain and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives; other material conflicts of interest must be at least disclosed.[1]

In essence, this language is putting heavy emphasis on the responsibility of your selected retirement plan advisor, and their professional due diligence, in considering investment suitability for your employees. It is stressing the importance of placing the clients’ needs and goals above the advisor’s interests. Given this guideline, it is in your best interest acting as a plan fiduciary, and in the interest of your employees, to properly vet your company’s financial advisor. What are some of the questions you should be asking your potential retirement plan advisor?

  • Do you and your firm have deep experience and a positive track record of successfully managing employer-sponsored plans to compare plan design and investment platform options?
  • Does your firm use an un-biased approach to investment selection, and what is your process for selecting, monitoring, and replacing investment options in our plan’s fund lineup?
  • Do you properly consider the fees, performance history, and risks associated with any underlying investments when determining or changing our fund lineup?
  • What processes does your firm have in place to measure our employees’ risk tolerance and investment objectives to ensure that their retirement plan investments are suitable for their unique needs?
  • Does your firm provide investor education on retirement planning or any other pertinent financial planning topics that could benefit our employees?
  • Does your firm have the ability to assume our fiduciary liability? If so, what precautions do you take to make sure our plan is remaining compliant with ERISA rules and SEC guidelines?

These questions can help guide you in selecting the appropriate financial advisor to manage your company’s employer-sponsored retirement plan. Make sure to choose an advisor who will serve as your ally and advocate in considering the best interest of your company and its employees.

If you have questions or would like a complimentary evaluation of your existing plan, please contact Bill Cannon, PSG’s Director of Retirement Plan Services, at bcannon@psgplanning.com

[1] https://www.sec.gov/news/press-release/2018-68