A compliance attorney fields four tough 401(k) questions amid crossfire provoked by Ric Lager's column

This is an enormous niche market for advisors, as Ric Lager and I have discovered over the years. Individual investors often have some of the largest amounts of their liquid net worth invested through their deferred compensation plan or 401k account at work (http://www.mullooly.net/my-401k-how-to-get-help), and get little or no direction. Advisors who are positioned properly can gain an entirely new market.

Peter, great article. Thanks for clearing up some of the big questions in this arena today.

Thomas Mullooly
<a href="http://www.mullooly.net">Mullooly Asset Management</a>

Peter, I know how valuable your time is. Thank you very much for your expert commentary here so other RIA’s can understand this issue more clearly.

Peter’s comments are right on the money, with one requiring further enhancement. On the point of fund withdrawals to pay fees, Peter correctly points out that such withdrawals cannot be done without the consent of the plan administrator. Peter expresses concern that plan fiduciaries may not be aware of their duties in this area. That may or may not be true, but it is a plan administrator responsibility and not the responsibility of the investment fiduciary, except to the extent that the investment professional must cooperate in providing proof of bonding and any other due diligence material requested by the plan. I advise plan fiduciaries to be sure that the investment management agreement that is presented by a plan participant to the plan, hiring his or her own advisor, contains language from the advisor acknowledging that he or she is a fiduciary with respect to the participant’s plan assets.

The DOL should make it easier, not more difficult, for participants to seek the professional advice they need. Advisors who do not accept any fees from any particular fund or other investment are already on the right path to providing this needed service. Please find a way to keep it economical for the participant.

Jan Sackley, CFE
Fiduciary Foresight, LLC
Risk and Regulatory Compliance Consultants
Twitter@FidFore
www.fiduciaryforesight.com

Jan,

It has been my experience that individuals that truly want this 401k advice have no problem paying for it outside of plan assets.
Yes, a little additional bookkeeping, but a terrific business.

Thomas Mullooly
<a href="http://www.mullooly.net">Mullooly Asset Management</a>

Peter, I’d like to walk through a scenario with participants and hear your thoughts on risk for plan sponsors.

Scenario: Participant A is 55 and has $150,000 in her 401k account. She has no money outside of her 401k account. She would like advice on when and how she can retire. The plan sponsor has nobody for her to get advice from. She finds a RIA who will charge her a flat fee to give her advice. She can’t pay for personally, so she asks her plan sponsor to pay for it out of her 401k account. The plan sponsor says no because it is too much risk as a plan fiduciary.

Fast forward 10 years. The lady doesn’t get the advice and she had invested in small cap stocks that tank at correction and she has $75,000 and she can’t retire. She calls an attorney and decides to sue her plan sponsor for not making available an advisor.

The plan sponsor’s defense is…my attorney said it was too much risk to make this service available.

Isn’t the risk here for plan sponsors unhappy and uneducated plan participants who will not be able to retire and want to blame somebody? I hear that the advisor is a fiduciary now and is the sponsor’s responsibility. But isn’t safer to make an advisor available than not? Especially if the participant brings the advisor to the table?

How else does the sponsor get into trouble for allowing a participant’s account balance be debited for advisory fees other than a participant complaint? And why will participant’s complain? Bad advice from an advisor the participant requests or denying the participant the resources to pay for their advisor?

This is where the fiduciary risk issue of compliance with regulations (not saying you shouldn’t know them and do your best to abide by them) don’t seem to address the real risks in sponsoring retirement plans…participant complaints of no advice or direction.

Peter Savarese’s “comments” above are right on point except for one issue. Payment of advisor fees from the SDBA account under a qualified plan does NOT eliminate the fiduciary responsibitiles he espouses throughout his string of comments. An SDBA account is still a “plan asset” and the plan document must permit such payments to be made which exposes other plan fiduciaries to the issues Peter raises in his comments under the sub-heading regarding the relationshiop between the “......Plan Sponsor advisor and the Participant advisor”.

Vince Birley’s above comment on 5/29/2010 illustrates the lack of knowledge concerning ERISA and a Plan Sponsor’s responsibilty. ERISA does NOT require participant “education” or “advice” nor does ERISA require the partipant to attain a sufficient level of retirement income. Vince’s last sentence asserts there is a “fiduciary risk” in sponsoring retirement plans in the event of participant complaints of no advice or direction. This is NOT correct. Let me reiterate that ERISA does NOT mandate providing any advice or education. In fact, when a plan sponsor provides such services, they are exposing themselves to greater risk e.g. vetting process of “participant” advisors, reasonable fees for such services, and on-going monitoring.

I recongize the ultimate goal among all participants and their respective individual weatlh planning advisors is to acheive their various objectives (e.g retirement savings, college savings, long term care etc.). In this regard, advisor’s whose primary practice is individual wealth planning will benefit (and elimate frustration!) if they understand the parameters of ERISA and how that may impact their approach to advising their clients with respect to these assets e.g. whether or not to assume “control” of these assets, attempting to get paid for their services from plan assets.

Brian C. Hubbell