Are you among the 55 million people who contribute to a 401(k) plan? Do you know if your plan's sponsor and fiduciary are acting in your best interest?

Well, they should be. And you should know whether they are.

In a speech at the Plan Sponsor Council of America's annual meeting recently, Blaine Aikin, the executive chairman of Fi360 and CEFEX outlined the core principles and associated practices for ERISA plan fiduciaries to enhance their reputation and mitigate risks. (ERISA is the federal law that sets minimum standards for most voluntarily established pension and health plans in private industry.)

And in an interview after his speech, Aikin discussed how 401(k) plan participants can evaluate whether their plan's sponsor and fiduciaries are acting in their best interest.

Here are those core principles:

What are the fiduciary obligations?

Start with this. "When there is a fiduciary to a plan, their obligation is to act in the best interest to the participant," said Aikin, who is also the former chair of the Certified Financial Planner Board of Standards.

"Understanding the core fiduciary principles and making sure that there is an overall program to assure fiduciary accountability -- I think that's what's really important."

For instance, do participants have the ability to invest in a way that is sound from a professional standpoint and which has a great outcome for the participant?

Now, there's been some debate over whether a fiduciary has, for instance, an obligation to pick the lowest costs funds for a 401(k) plan. From his perspective, Aikin said a fiduciary would indeed select an institutional class share over a retail class share if available. The former is less expensive than the latter. "If the institutional shares are available and they're essentially the same, that's in the investor's best interest," said Aikin.

Aikin said it's also worth noting that participants do have a challenge in terms of figuring out all these intricacies. He suggests asking whether the plan has a CEFEX certification. Though relatively new, the CEFEX Investment Steward certification demonstrates fiduciary excellence based on a fiduciary best practice standard. At present, there are about 200 fiduciaries who are certified.

Is the plan being monitored?

Aikin also recommends asking the plan's sponsor specifically how they navigate their fiduciary duties, and are they meeting some fundamental fiduciary principles.

Ask, for instance, the following questions:

  • Does the investment committee understand the fiduciary duties they have?
  • Do they have training for that?
  • Is there a regular program to monitor their performance relative to the fiduciary duties?
  • How are costs controlled?
  • What steps are taken there?

"It's particularly important that plan participants learn how the plan sponsor and fiduciary monitor the plan," says Aikin.

Also learn how decisions are made to make sure that participants have the investment options available to them to do proper diversification.

How are conflicts of interest controlled?

Learn how the plan's service providers are selected, what conflicts exist, and how those conflicts are addressed. "Any time you select a service provider, you are looking at their capabilities, and you are looking at the costs, and the costs have to be fair and reasonable for those services provided," he said.

To be fair, plan participants might not know how to spot conflicts of interest. They might not understand the revenue sharing arrangements that exist between 401(k) plans and service providers. They might not understand what the plan's recordkeeper is charging for or not charging for, or what the plan sponsor is receiving in terms of compensation.

Want to know more? Read Understanding Revenue Sharing & the Flow of Money in Retirement Plans.

But following the money is a worthwhile task. "Typically, it would be compensation-type conflicts, particularly in a service provider," Aikin said.

Now, it's not easy for plan participants to monitor the compensation of the recordkeeper. "It is very difficult to delve into the intricacies of this, but it's the duty of the plan sponsor to control costs," Aikin said. "It's imprudent to waste money."

Still, Aikin suggests learning who's getting compensated and for what. "Certainly, whenever there are third parties, whether it's fund companies and revenue sharing, or whether the funds are coming from sources outside of the plan itself, then there are conflicts that could be involved," he said.

Is the service provider a fiduciary?

Learn also what service providers are acting in a fiduciary capacity versus those that are not. Some service providers might be performing merely administrative tasks. "But when you get to the investment advice side, then it really is important to know that there are fiduciaries, and have those conflicts either avoided or managed," said Aikin. "If they have accepted fiduciary accountability then they're required to avoid or manage those conflicts. So, that's the most certain way to know."

Does the plan have investment policy statement?

Determine whether your 401(k) plan has an investment policy statement or IPS. Plans should have one, but not all do, said Aikin.

"This is something that they should definitely ask about because it is essentially the business plan for the management of the monies, and so it's considered a governing document," he said. "It does lay out exactly how the investments are to be selected... and how do they perform their due diligence, how do they select their service providers, how do they manage conflicts of interest. All of those elements can be laid out in the investment policy statement, and it should exist there."

Here's an example of an IPS.

Check what measures are in place for cybersecurity.

Determine what policies and procedures are in place to protect your information and assets. Some plans have cybersecurity certifications and/third-party reviews of their systems. "Anytime you have that kind of third party review it's a good way to make sure that the bases have been covered," said Aikin.

Check your target-date funds.

Aikin also says it's a good idea to learn whether your target-date fund is aggressive, moderate, or conservative; what the glide path is; whether it's a "to-retirement" or a "through-retirement" fund; whether the fund is appropriate given the demographics of the employer's workforce; and whether the benchmark against which the fund is measured is appropriate.

"The difficulty is that I think we are at a stage that falls short yet of having good benchmarks for the target-date funds," said Aikin. "Oftentimes, whenever various target-dates are compared, we are comparing apples and oranges, because they are designed to accomplish different elements."

So, here again, Aikin said it's a question going to the plan sponsor and asking how the funds were selected. "Get education about how those particular target dates operate, and to determine whether it's appropriate," he said.

Aikin noted that target-date funds are one of several qualified default investment alternatives that a participant could be defaulted into if they don't make the election of their own. "Go to the plan sponsor, and also to the provider of the target-date fund, for education about how it exactly operates, and the profile that it's suited for," he said.

How much will your accumulated wealth provide in terms of retirement income?

Plan sponsors and fiduciaries used to focus on something called terminal wealth. How much money the participant accumulated. Now, many are focusing on how much the accumulated wealth will generate in income for the participant. "That's become sort of the hot button right issue today in terms of what needs to be put on a plan participant statement (and the IPS)," Aikin said.

Is the fiduciary providing education?

Plan participants should also check whether there's enough education and access to advice. "There is a certain level of financial literacy that's necessary, but we really don't have broadly distributed throughout the working population," Aikin said. "So, that's another opportunity for plan sponsors to differentiate to provide their participants basic access to either education or professional advice, or preferably even the opportunity for both."

This, said Aikin, is an area of vital importance to not only the individual, but to society at large, "because we are all going to be dependent on how successful people are in saving for retirement."

Here's A Checklist to Protect Your Retirement

  1. Does your plan's sponsor and fiduciary follow laws and governing documents?
  2. Did your plan's sponsor and fiduciary diversify to manage risk and return?
  3. Did your plan's sponsor and fiduciary prepare and follow an investment policy statement?
  4. Does your plan's sponsor and fiduciary use prudent experts?
  5. Does your plan's sponsor and fiduciary control costs?
  6. Does your plan's sponsor and fiduciary avoid conflicts?
  7. Does your plan's sponsor and fiduciary monitor fulfilment of fiduciary obligations?
  8. Does your plan's sponsor and fiduciary foster continual improvement?

Read Fiduciary Responsibilities and Meeting Your Fiduciary Responsibilities.

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