"If left unchecked, conflicts-of-interest could... amount to a significant reduction in retirement savings".
According to a 2011 the Government Accountability Office report "if left unchecked, conflicts-of-interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker's career." The report found that a number of 401(k) service providers are recommending investments that may not be in the best interests of retirement plan participants. Additionally, these service providers were intentionally structuring their relationships with 401(k) plans to avoid being held responsible for poor performance.
The following are four examples of potential areas of vulnerability of 401(k) plans:
1. Third-party payments and Revenue Sharing
Some service providers operate as independent, fee-only advisers who are compensated solely by their clients. Other service providers receive revenue sharing payments from investment fund companies. The service provider may receive greater compensation from funds with poorer performance or higher costs for participants. According to the GAO report "The structure of advisers' compensation and their other business arrangements could create competing interests that may bias their investment recommendations to plan sponsors or participants." The GAO found that revenue sharing payments ranged from 5 to 125 basis points.
2. Fiduciary or Not?
According to industry experts, many plan sponsors do not understand whether or not providers to the plan are fiduciaries, nor are they aware that the provider's compensation may vary based on the investment options selected.
Fiduciaries are prohibited from benefiting from the investment of plan assets and required to act solely in the interest of the plan's participants and beneficiaries. But fairly often, service providers structure their contracts to attempt to avoid meeting at least one of the five parts of the current definition of a fiduciary. If a service provider does not meet all parts of the fiduciary definition the Employee Benefits and Security Administration cannot recover losses related to conflicts of interest like they can if the service provider is a fiduciary.
3. Education or Advice?
Investment education is defined as general financial and investment information which explains investment terms and concepts. Providers may use their own funds as examples
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According to a 2011 the Government Accountability Office report "if left unchecked, conflicts-of-interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker's career." The report found that a number of 401(k) service providers are recommending investments that may not be in the best interests of retirement plan participants. Additionally, these service providers were intentionally structuring their relationships with 401(k) plans to avoid being held responsible for poor performance.
The following are four examples of potential areas of vulnerability of 401(k) plans:
1. Third-party payments and Revenue Sharing
Some service providers operate as independent, fee-only advisers who are compensated solely by their clients. Other service providers receive revenue sharing payments from investment fund companies. The service provider may receive greater compensation from funds with poorer performance or higher costs for participants. According to the GAO report "The structure of advisers' compensation and their other business arrangements could create competing interests that may bias their investment recommendations to plan sponsors or participants." The GAO found that revenue sharing payments ranged from 5 to 125 basis points.
2. Fiduciary or Not?
According to industry experts, many plan sponsors do not understand whether or not providers to the plan are fiduciaries, nor are they aware that the provider's compensation may vary based on the investment options selected.
Fiduciaries are prohibited from benefiting from the investment of plan assets and required to act solely in the interest of the plan's participants and beneficiaries. But fairly often, service providers structure their contracts to attempt to avoid meeting at least one of the five parts of the current definition of a fiduciary. If a service provider does not meet all parts of the fiduciary definition the Employee Benefits and Security Administration cannot recover losses related to conflicts of interest like they can if the service provider is a fiduciary.
3. Education or Advice?
Investment education is defined as general financial and investment information which explains investment terms and concepts. Providers may use their own funds as examples
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