Consumer Protections in Retirement Plans

Are your investment advisors acting in your best interests?

Codes of conduct for those managing your plan and what you need to know to protect yourself if you’re moving retirement money out of your retirement plan and into IRAs or other investments.

There are federal laws that govern the behavior of certain people who manage private retirement plans (pension plans that pay a specified periodic benefit during your retirement, and 401(k) and similar kinds of plans to which you and possibly your employer contribute).  These rules of behavior apply to plan fiduciaries.  Your employer is generally a fiduciary and some of the people or firms who manage your plan may also be fiduciaries.

The good news is that these federal laws require plan fiduciaries to act in your best interests and prudently.  What this means is that a fiduciary must invest plan assets with only your interests, and the interests of the other plan participants, in mind and must use care in making those investments.  If the plan lets you choose investments from a menu of alternatives, the fiduciary must make sure that the investment choices available to you were carefully chosen and do not have unreasonably high fees.  The fiduciary must also monitor the plan investments offered to make sure that they remain reasonable choices for you and the other plan participants.  However, the choices you make about how to allocate your account among the investment alternatives offered to you are your responsibility.

The companies that fiduciaries hire to advise them on investments may be but are not always fiduciaries.  But the good news is that the person(s) or entities that actually makes decisions about how plan assets are invested or what investment choices are available are always fiduciaries who are required to act in your best interests.

Keep in mind that these strict fiduciary standards apply to the fiduciaries who run your private retirement plan. The laws regarding investment advice are less protective once you take your retirement money out of a plan and instead invest it on your own.  We talk about this below.

Here is a problem to watch out for.  The people who keep records for the plan and who you may speak with when you retire or otherwise leave a job may not be fiduciaries.  If they advise you to roll-over money or to take a lump sum, they are not necessarily acting with only your interest in mind.  Indeed, they may get paid high fees for managing your money if you take their advice and invest your rollover or lump sum money with them.  Some mutual fund companies will pay bonuses to their employees when they persuade people to roll over assets.

Indeed, it is often the case that you would be better off leaving your money in the plan, where the fiduciaries do have a duty to make sure fees are not too high.