How do I know if a conflict of interest exists with my 401k plan investments?
There are 3 basic questions related to plan investments you can ask that can uncover potential conflicts of interests.
- How is revenue sharing allocated?
The best practice is to allocate it back to participants that earned it. If this is not happening, it could indicate that the fees in your plan are not levelized across all participants. What this means is that some participants may be paying more than their fair share of the plan expenses.
Also, if your provider keeps the revenue sharing, it serves as an incentive to promote investments that generate more revenue.
- Are the lowest cost share classes of investment being utilized?
Only using index or institutional investments doesn’t always result in the lowest cost for your investments. Crediting revenue sharing and marketing allowances back to the participants earning them should result in the most efficient investment cost helping minimize expenses and maximize returns.
Note: Some providers do not allocate 100% of the revenue sharing back to the plan or plan participants. It is important to ask what percentage of the revenue sharing is actually being credited back to the plan or plan participants.
- How do I ensure there are not hidden fees in my 401k plan?
One of the biggest culprits of the hidden fees is incentives or plans designed to use proprietary investments (the provider’s own investments). If your plan is required to have its default investments set to proprietary investments, this is a signal a “push” is being made towards investments that may drive additional revenue to the provider and, in my opinion creates a conflict of interest.
I know it is hard to believe, but these are complicated questions and sometimes the answers or information you receive from your provider is even more complicated and sometimes misleading.
Our goal is to operate in a transparent environment and help our clients identify issues and be in a position to provide them solutions to better their plan.
If we can be of assistance in helping you better your plan, please contact me at firstname.lastname@example.org.
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. Investment Advice and 3(38) Investment Fiduciary services offered through Diversified Financial Advisors, LLC, a Registered Investment Advisor. 3(16) Administrative Fiduciary Services provided by PISTL Service Corporation. Discretionary Trustee services provided by Printing Industries 401k Trustees. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.