JUNE 2023

Retirement plans offered through one’s employer, such as 401(k), SIMPLE, or Profit Sharing Plans, are the most common way Americans invest – often it is the only account through which workers invest – and as such deserve more focused attention from employers who control access to the investment menu. Many American workers aren’t fortunate enough to have a retirement plan through their employer, but for those that are saving from their paycheck is only half the battle. Investment options can be overwhelming, complex, expensive, and outdated. Participants rely on those in positions of power to make intelligent and prudent choices regarding which investments are available.

The prudent business owner (or others responsible for the retirement plan), who has a fiduciary responsibility for the investment menu, ensures that the investments they choose to offer are high quality, sufficiently broad for participants to diversify their account while not being so broad as to overwhelm the participant, are low cost, and are regularly reviewed for a historic record of performance. Applicable rules and regulations, chiefly the Employee Retirement Income Security Act of 1974 (as amended by SECURE 1.0 and 2.0), define this relationship as fiduciary in nature. The courts see a fiduciary relationship as the highest legal standard to meet in the land.

Within the context of an investment menu meeting your fiduciary responsibilities includes careful attention to the above on a regular schedule. The investment menu should be reviewed at least annually, if not more frequently, and this review should follow the procedures included in your Investment Policy Statement – the written policy that lets participants know how you will construct and monitor the investment menu. (Pro tip: if you do not currently have an updated Investment Policy Statement, this should be the first thing you work on – it’s the first thing a government auditor is going to ask for.)

Being a fiduciary does not mean you have to be correct. As long as you have a thorough written process that you follow, and you document your decisions, you have gone a long way towards fulfilling your fiduciary duties. But the key standard in all of this is that the decisions you make absolutely have to be in the best interests of your participants – you cannot consider your own as a fiduciary. For example, if you have a preference for a certain mutual fund company because they have always treated you well personally, that cannot be factored into your decision on including that company in your plan’s menu. Another example is when you decide to offer your retirement plan through the same company you do your business banking with because it is convenient, even though that might not be what your participants would choose. In both example you could be held liable for placing your own interests above your participants’.

Many fiduciaries recognize this risk when constructing an investment menu and seek to outsource their risk to professionals. The most common way of doing so is relying on the advice of a financial advisor, typically done during a once- or twice-annual review. The advisor may make some recommendations about funds that are underperforming, or they may have new options available, etc. While this advice certainly helps, fiduciaries must understand that they have no legal protections when simply relying on the advice of these professionals. The only outsourced service providers that clear the fiduciary is what is known as a 3(38) Investment Fiduciary. These service providers acknowledge in writing their responsibilities as fiduciaries and have discretionary control of the investment menu that is entirely removed from the business owner. More limited investment advisors, known as 3(21) fiduciaries, only provide monitoring and advice – leaving the final discretionary decisions (and thus the risk) behind.

At the end of the day most fiduciaries will never face scrutiny (or worse: lawsuits) for their investment menu decisions. But because of their privileged positions and responsibilities, fiduciaries owe it to their participants to construct an objectively high-quality investment menu. By putting in place written procedures, and following them to the letter, fiduciaries can be sure they’ve done everything they can to help their participants succeed.

For more information contact:

Andrew Thompson
The Capital Group
608-268-5100
andrew.thompson2@LFG.com
Meet with Andrew

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This material is designed for informational or educational purposes only. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. We encourage you to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.

Andrew Thompson is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor.