Retirement Planning: Whose Interests Come First

Retirement Planning: Whose Interests Come First 2560 1707 Balance Point Team

retirement plansThe recent Fiduciary Proposal set forth by the Department of Labor has many retirement plan sponsors asking what this will mean for them and their employees moving forward.

The overarching theme of this initiative is to ensure that financial advisors are acting in the best interests of the retirement plan participants and the plan sponsors.

Although this might seem like common sense to most of us, there haven’t been clearly defined guidelines in the past regarding certain actions which may result in a conflict of interests between the financial advisor and the retirement investor.

To start to wrap your mind around the new DOL proposal, you need to understand the foundation of a plan sponsor’s fiduciary responsibility toward an ERISA retirement plan: the plan is to be put in place for the benefit of the participants first and all other parties second.  This is an important concept to acknowledge since it will help guide plan sponsors and financial advisors through the process of addressing their fiduciary responsibility as it pertains to advisor selection, plan fees, and investment selection:

Selecting The Appropriate Financial Advisor For Your Retirement Plan

To begin your evaluation of the financial advisor(s) who will service your plan and support the employees, you need to know whether they will be acting as a Broker or a Registered Investment Advisor (also known as an RIA).

Brokers typically provide investment education only and are generally compensated on a commission-basis. Advisors typically provide investment advice and are compensated on a fee-basis.  You may ask, “What’s the difference?”

Advisors are held to a higher fiduciary standard as they are not just providing you with the education to make your own decisions but rather are making suggestions regarding certain actions such as investment selections for the plan’s fund line-up, rollovers from previous retirement plans, guidance for an employee’s individual asset allocation, etc.

Since these actions are considered recommendations and not purely investment education, the Advisor becomes a fiduciary on the plan and shares the liability with the plan sponsor.  The selection of an Advisor (or RIA) now places the plan sponsor and the financial professional on the same side of the table since they would share the responsibility of the plan as fiduciaries.

As recent regulations have tightened to protect the rights of retirement plan participants, one of the areas of focus for the Department of Labor is the existence of variable compensation for Brokers assigned to the plan.

The DOL is looking to eliminate this occurrence as Brokers could influence the participants to select certain investments within the retirement plan which would pay the Broker a higher commission than other investment options in the plan.

The most recent updates are guiding plan sponsors toward fee-based platforms with the support of an RIA in the effort to provide the participants unbiased financial advice.  This model puts the client’s interests first as the RIA’s advice is not influenced by commissions.

How Do I Design A 401(k) Fund Line-up?

There are three main bullet-points a plan sponsor should consider when designing or refining a retirement plan’s fund line-up: diversification, fund screening, and share class.

  • First, you should ensure that the plan offers a well-diversified mix of funds so that an employee could design a suitable asset allocation from the menu regardless of whether they are 22 years old or already in retirement.
  • The second criteria focuses on the performance and rating of the fund’s history.  The plan sponsor and advisor should work together to design a fund line-up with high ratings versus their peers, strong management tenure, low fees, minimum style drift, etc.  The fund menu should be reviewed over time to ensure that the investment options are still current and have not shown a trend of downward performance compared to their peers.
  • The final responsibility relates to the expenses charged by the fund managers.  Since most plan sponsors aren’t aware of the difference in expenses between C, R, A, and Institutional Shares, they may not be aware that they could potentially use some excess revenues from these funds to pay for the plan’s operating costs and/or reduce the fees charged to the participants’ accounts.

Set It In Motion

The rules can be confusing and even seem contradictory in some cases.  Therefore, the new DOL proposal tasks financial advisors to take on a greater fiduciary responsibility in retirement planning so they have greater accountability for their actions.  The retirement industry is moving in a more responsible direction to protect plan participants.  Sponsors should use this to their advantage and employ a financial professional to assist them with the design of their retirement plan or hold current financial advisors accountable for the compensation they are receiving for being assigned to the plan.

This is a guest post by Mark R. Deters, ARPC

Mark is a Retirement Plan Advisor & Broker at Sentinel Benefits & Financial Group. He consults for-profit and not-for-profit organizations in the areas of investment selection and fiduciary oversight within retirement plans.  For more information, visit

Financial planning and investment advice are offered through Sentinel Pension Advisors, Inc., an SEC registered investment advisor. Investment brokerage services offered through Sentinel Securities, Inc. Member FINRA & SIPC.  

Diversification neither assures a profit nor guarantees against a loss in a declining market. There are no assurances that any strategy will meet its objective.

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