As an ERISA attorney for 13 years, I am amazed by how often I find participant directed 401(k) plans without a financial advisor assisting the plan sponsor and participants. I understand how solo 401(k) plans and owner/participant only plans don’t have an advisor because individuals think they can do it on their own (and there is no chance they will sue themselves if they lose money). I have a solo 401(k) plan and I handle my own investments. I always say that the moment that I add an employee, I am going to hire a financial advisor and there is an easy reason why, it’s called limiting my fiduciary liability (which is personal liability as plan trustee).
The reason that many 401(k) sponsors and other retirement plan sponsors don’t hire a financial advisor is because of their lack of understanding on why they need one. Many employers that sponsor participant directed 401(k) plans think that all a financial advisor does is pick investments and they have a mistaken belief that role is obsolete in their minds because a participant is going to direct their investments anyway which limits their liability under ERISA §404(c).
Section §404(c) protection is a sliding scale, the more management that a plan sponsor has over the fiduciary process and the more education given to plan participants, the more protection from fiduciary liability they will get. There are too many plan sponsors who don’t manage the fiduciary process with a financial advisor to guide them who think that the fact the plan is participant directed is protection from liability. Section 404(c) is not a suicide pact, the plan sponsor and trustees have to get involved in the selection of participant directed investments to get any liability protection.
When it comes to participant directed 401(k) plans, the main role of a financial advisor in my opinion isn’t picking mutual funds. While some providers are touting their “fiduciary guarantees” about the funds they have selected to satisfy the broad range of investment requirement under ERISA §404(c), I believe that with all due respect to Commander Montgomery Scott from Star Trek III, that a monkey and two trainees can pick a mutual fund lineup to meet that broad range requirement. Picking investment options under a retirement plan is only a small part of what a financial advisor brings to the table, it’s their expertise and background in monitoring investments and investment education that are their most important roles in serving plan sponsors and trustees for their retirement plan needs. In addition, some of these financial advisors offer themselves as independent ERISA §3(21) and §3(38) fiduciaries which can greatly mitigate a plan sponsor’s and trustee’s fiduciary liability.