Financial Opinion and Insights

Plan Sponsors Guide To The Ideal Plan Structure

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Everyone hates report cards; but, without them, we’d never know how we stand against expected standards of conduct.

When it comes to a corporate retirement plan sponsor’s fiduciary responsibilities, failure to know where one stands can result in serious consequences.

How do you know when your plan structure is ‘best-in-class’?  Northern Trust in their October 2010 study  identified “Characteristics of Ideal Plan Structure”.     Their findings cab help plan sponsors identify and remove headaches before they begin.

A true fiduciary MUST act SOLELY in the best interest of plan participants and for the EXCLUSIVE purpose of providing retirement plan benefits.    I’ve capitalized the key words for a reason:  They’re critical… and they apply to plan sponsors who make decisions on their company plans… they also affect anyone else doing the same thing.

Recognizing the difference between a true fiduciary advisor and a vendor rep is key.  Patrick C. Burke, Managing Principal of Burke Group, a retirement, actuarial and compensation consulting firm in New York stated in a recent  interview for Fiduciary News,  “Bundled providers’, brokers’, and financial intermediaries’ operating models cannot be considered best-in-class due to their inherent and unsolvable conflict.   This would include any RIA who participates in a revenue sharing or 12b-1 compensation package. They are primarily in the investment business which excludes their ability to be conflict free, a basic requirement of any plan sponsor that desires to achieve best in class status. These firms are the classic example of a fox in sheep’s clothing.”

Think 12b-1 fees and revenue sharing are unimportant?  You need only follow the money.  If providers are being paid from the revenue sharing of those 12b-1 fees, what are the chances a fund paying revenue sharing will be replaced with a low-cost, true no-load fund that charges no 12b-1 fees or pays revenue sharing?    Unfortunately, far too few plan sponsors are even aware of this issue’s seriousness or the extent of their personal liability. 

I even heard one exclaim, “I’ll take my chances.”    I once heard another say, “Our advisor isn’t a fiduciary on the plan…”, as if this was a good thing. 

Still another once said to me, “We provide a huge selection of funds…”, and in the same breath said, “we don’t worry about providing investment education.”  

Does that sound like a fiduciary to you?    If a vendor doesn’t want to take fiduciary status, the question has to be, ‘Why not?’ 

Back to planet earth. 

Burke, among many other true fiduciary advisors advises plan sponsors to have a Fiduciary Report Card completed by an independent, outside, non-conflicted plan consultant.  This approach helps  plan sponsors focus on “best in breed” service providers and also helps create evidence of a true fiduciary process.

Fiduciary Report Card Topics:

1) Regulatory Compliance

2) Independence of Providers – Vendor & Provider Conflicts of Interest;

3) Integrated Investment Policy Statement (IPS)

4) Documented Investment Due Diligence and periodic provider benchmarking

5) Trustee and Participant Education.

If you haven’t addressed these issues in the past twelve months, this might be the time to do it.   Those who are depending on their retail vendor-driven providers for new disclosures might find themselves scrambling to play catch-up later.

You may want to contact an ERISA attorney and an independent plan consultant.   I’m not an ERISA attorney; but, I think I might know a plan consultant…. if I can just think of his name……


Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

February 7, 2012 at 8:05 am