Our Writings

Fiduciary Guarantee: A false sense of security

Summary:  There are significant exceptions to the 401(k) warrantees that we have reviewed that render them fairly ineffective in protecting employers/fiduciaries.  If an employer wants to rely on a fiduciary warrantee, we highly advise spending a few hundred dollars to discuss the relative merits with an ERISA attorney.  A warrantee of questionable depth does not take the place of a qualified provider acting as a fiduciary alongside you.

Last year I had the opportunity to meet with a busy business owner that was taking his 401(k) plan to bid.  Let’s call him Jack.  Sensing that I was about to bore him with the word “fiduciary”, Jack reached into a drawer in his mahogany desk, and, with a playful smile pulled out a document.  As he slid it across the desk, I immediately notice a large, important looking embossed golden seal on the document.  Upon closer review I saw that seal proudly stated that it was a “Warranty to Plan Fiduciaries” and the top page of the document let the owner know that “you can rest assured that your fund selection is both monitored and backed by our word-at no additional cost to you.”

“So, now I don’t have to deal with the fiduciary mumbo jumbo everyone’s been bugging me about”, Jack proudly proclaimed, crossing his arms and watching my reaction.

Flipping through the document to reveal the next 2 pages of fine print, I mentioned that I had not seen a guarantee like this, but that I would review it and share my thoughts.  If it were valuable, I thought to myself, we would be able to use a platform like this as well to secure a Fiduciary Warrantee on his behalf.

Why a Warrantee?

Since that day, major platform providers have geared up their marketing machines touting these fiduciary warrantees.   For decades, 401(k) plans for small businesses were largely in the hands of generalists who potentially also handled a business’s health, life insurance, and other benefits.  Although those 401(k) plans were (unbeknownst to the business owner) typically on annuity platforms with bloated expense structures (see the Forbes article “Retirement Plans from Hell”), it was simple to work with one provider.  Typically, the provider who had the relationship with the business owner got the business.

Times have changed; however, as the Department of Labor has begun focusing on plans that charge employees too much money and employees have begun suing.  Lawsuits for breach of fiduciary duty have increased 25% every year for the last 4 years.  These lawsuits pierce the corporate veil, in other words, fiduciary’s personal assets are at stake!

Sensing the increased risk, business owners began moving their plans from generalists to specialists.  Those specialists, on average, have been more apt to have a fiduciary process in place, and in some circumstances (such as with our firm) will even act as a fiduciary.  The fiduciary process, in turn, helps to contain expenses, which has generally been to the detriment of the large annuity platforms.  These platforms know that they need to combat the loss of business from this fiduciary focus. But they have certain problems.

  1. They cannot convert their sales force to specialists.
  2. Complying with the “reasonable expenses” fiduciary requirements becomes difficult with their cost structure.

So, instead of helping to solve and decrease fiduciary risk, they are preying on the emotions of the fiduciaries.  With a gold embossed, official looking certificate they are feeding employers a false sense of security.

What does the warrantee not cover?

Although our review is not exhaustive, and we again stress the services of a qualified ERISA attorney to review in depth, we typically do not see any protection for the majority of the most litigated areas, namely;

1.)    Ensuring reasonable expenses

2.)    Ensuring that plan investments are suitable to your plan and employees

3.)    Offering education to your employees

In the fine print of that first warrantee we saw, it explicitly stated that the warrantee “does not extend to any claim that any investment option is suited to the needs of any individual Plan…or to any claim that any fees or expenses paid directly or indirectly by the Plan are reasonable.”  Although we cannot find official statistics, I would imagine those two claims encompass the vast majority of lawsuits!

Our take

We believe that these warrantees provide, at best, a very small amount of insurance for a 401(k) plan.  At worst, we believe these can be downright deceptive.  A fiduciary guarantee is not a substitute for an ERISA 3(21) (cofiduciary) or 3(38) (investment fiduciary), or Multiple Employer Plan.


If you are concerned about potential risks in your 401(K) plans, or simply want to find a better option for you and your employees, why not consider a transparent solution that puts your needs first?  Call Beacon Hill Investment Advisory at (614) 469-4685 or email Mark or Clint. 

We do not provide tax and legal advice.

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