Conflicts of Interest in Retirement Plans

By Eric Sholberg, CPA, AIFA | Jun 15, 2018 |

How conflicts of interest can affect your employees’ retirement savings and what to do about it as a plan sponsor.

conflicts of interest in retirement plans

Conflicts of interest embedded in employee retirement plans cost Americans up to $17 billion in retirement savings each year.

In this guide, we’ll explore what the potential conflicts of interest in retirement plans are and how you can eliminate them as a plan sponsor.

What is a Conflict of Interest in Employee Retirement Plans?

By definition, a conflict of interest is “a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another.”

Conflicts of interest in retirement plans can take many forms and are rarely transparent. The most common conflict is when a 401(k) service provider recommends investments that may not be in the best interests of plan participants, but offer the provider more compensation. These recommendations may also be deliberately structured in a way so that the provider avoids any legal responsibility.

An example would be a bundled solution provider with proprietary funds. Many employers rely on the assistance of the provider to make a decision. If the provider has a conflict of interest, they may direct the employee to investment options that increase the provider’s compensation. The options may be suitable but are usually more expensive and, in the end, subtle differences in investment options can mean drastically diminished retirement outcomes for your employees.

10 Signs of Conflicts of Interest in Retirement Plans

As a fiduciary of your company’s retirement plan, it is your responsibility to ensure you’re making decisions that best serve the interests of plan participants and that you eliminate any conflicting advice.

If you aren’t sure whether conflicts of interest exist in your plan, ask yourself the following questions:

  1. Is your provider paid from the fund expense?
  2. Does the recordkeeper, third-party administrator, or advisor (providers) receive different compensation on different fund choices? Are there 12b-1 fees charged on the investment options?
  3. Are your providers using your plan to solicit business from your employees?
  4. Do the providers get paid finder’s fees for the other providers they propose?
  5. Does your provider offer proprietary funds?
  6. Does your provider own any significant amount of any funds that are in your plan?
  7. Does your provider primarily offer actively managed funds? Actively managed funds typically have higher fees and higher trading costs than index funds. Considering that only a fraction of actively managed funds beat their indexes in any given year, one could argue that no actively managed fund in a 401(k) plan is ever worth the additional cost.
  8. Do you need clarity on whether or not your investment options are in the appropriate share classes?
  9. Does the provider offer asset allocation funds? They may carry higher expenses or pay the provider more in some other way.
  10. Does your provider receive soft dollar revenue from the funds?

If you answer “Yes” to any of these questions, you might be on the short end of a conflict of interest. The good news is you are not powerless to protect your investments.

How to Mitigate Conflicts of Interest

The best defense is to take the time to review your retirement plan and investigate any potential conflicts that could call into question your diligence as a plan sponsor.

If you need help auditing your 401(k) plan for possible conflicts of interest, reach out to our team of retirement plan advisors for complete transparency.

Let’s talk

Whether you have a specific question, or you’re interested in learning more about how our approach can be tailored to your situation, we’d love to hear from you.