How to Avoid Conflicts of Interest in Your 401(k) Plan
As a plan fiduciary under ERISA (Employee Retirement Income Security Act), you have certain obligations you must uphold. One of those is to avoid conflicts of interest with regards to the 401(k) plan.
On the Department of Labor (DOL) website, it is stated this way: “(plan fiduciaries) may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.”
So, what are some of these conflicts of interests the DOL is warning against?
Imagine you work with a bank to handle all of your commercial lending. And suppose that same bank approaches you and says something like, “We sure got you a sweet deal on that loan. Great interest rate, too. I really had to go to bat for you to get that rate. You know, we could take care of your 401(k) plan also. It would really help ensure that you maintain preferred status.”
Or, if the company that handles your payroll tells you they can drop their fees on the payroll services if you let them handle your 401(k) plan? Perhaps the record keeper you use strongly encourages you to use their own name-brand funds or Target Date portfolios because it will lower your fees. Does your 401(k) plan broker/advisor receive different amounts of commissions based on the funds/investments they recommend?
If you apply the test used by the DOL above, and any of these situations benefit other parties — like the bank, the payroll company, the record keeper or the broker — then there is a potential conflict of interest.
Don’t get me wrong — working with your bank or your payroll provider is not by itself a conflict of interest. It’s how that process is handled that requires monitoring. Making a decision about the plan assets or choosing a service provider should be handled on a stand-alone basis. Evaluating plan fees and investments should be conducted independently of any kind of business relationship. After you do your due-diligence, you may find that your bank or payroll provider provides the best service at a reasonable fee. If so, proceed as you like, but be sure to document the research in your fiduciary file.
As for proprietary funds, I encourage you to read this article on our website to better understand how to navigate those investments — Does Your 401k Plan Contain Proprietary Investments?
In the end, successfully preventing conflicts of interest is directly related to how seriously you regard your role as a plan fiduciary. Engaging with quality service providers that specialize in the 401(k) industry can help ensure that these, or any other conflicts, are avoided.