It’s not the kind of clash that involves jabs, strikes, and physical blows, but conflicts with your record keeper can lead to even more serious consequences than a fist fight.
As we have seen with the Department of Labor’s recent investigation into Wells Fargo potentially steering its retirement-planning clients into proprietary products, record keepers who push clients toward in-house investments are in violation of the Employee Retirement Income Security Act of 1974. This federal law was designed to protect individuals in pension and health plans. If your record keepers are doing the same, your fiduciary responsibility is possibly in jeopardy.
Essentially, record keepers track assets in retirement plans – they maintain the accounting of plan contributions and serve as the plan’s bookkeeper. However, that isn’t all they can do – and advocating proprietary products is of particular concern in today’s investment environment.
As a plan sponsor, you are responsible for every service provider hired for the benefit of the retirement plan. This includes the quality of service, availability of choice and pricing – it should also limit potential conflicts. Importantly, plan sponsors are also responsible for ongoing monitoring of the plan – as the well-known Tibble case has made especially clear.
Recording Your Choice
Choosing a record keeper is a bigger deal than some plan sponsors realize. Simply put, you can choose a record keeper who has no proprietary investment products or one that does. Further, some of the largest record keepers in the industry have their own fund products, such as Fidelity, Vanguard, Voya and Transamerica Retirement Solutions.
It is important to note that record keepers do not typically have a fiduciary responsibility, where they are expected to offer the highest standard of care for clients. To that end, they are often pleased when you choose their products for your plan – they make more money. It is not uncommon for record keepers to make it easier for you to choose their products by the way they organize and present information and materials.
Unfortunately, record keepers can make more profits from proprietary funds than from record keeping itself.
So, if you choose proprietary funds from your record keeper, you are then charged with paying extra-special attention to this embedded conflict and ensuring that those proprietary funds meet the investment criteria and requirements you’ve established in your Investment Policy Statement. Plan sponsors who fall asleep at the wheel and select in-house funds that don’t meet the criteria fall short of their fiduciary responsibilities – only to enhance the record keeper’s profit.
If you select a recordkeeper with proprietary funds, it is best to limit or entirely eliminate those products to avoid a built-in conflict that needs ongoing monitoring. If your fund line-up has 70 or 80% of the recordkeeper’s product, have you done the best by your participants? This potential conflict simply does not need to exist and is easily avoidable.
If you have questions about selecting a record keeper or potential issues, we are happy to offer more information and input.
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