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How to Identify and Avoid Them

OJM Group has reviewed many qualified retirement plans (QRPs) for businesses and professional practices, including 401(k)s, profit-sharing plans, defined benefit plans and hybrid plans. Common denominators in many of these plans are four pitfalls that are either costing the company more in fees or subjecting the business or its owners to potential liability. In this article, we will identify the leading issues we have observed in QRPs and offer potential tactics for avoiding them.

  1. You are paying too much in fees for recordkeeping, third-party administration, or investment advisory services.

Many QRPs are either paying far too much in fees or simply aren’t getting much for the fees they are paying. Some fees can often be disguised in the underlying fund ratios from which the service providers are reimbursed. It is important that the trustees and managers overseeing these plans fully understand the plan design, the fees the plan is paying, and the role of each underlying party. A plan that fails to monitor any of these elements can expose the company to possible lawsuits.

One way to circumvent this potential service and fee issue is by having an independent company facilitate periodic benchmarking reviews. These reviews are compiled using third-party information to evaluate the services provided to a plan for the fees being charged and relate those services to other similar plans in a benchmark group. Not only will the benchmarking review help the plan meet its fiduciary responsibility, the review can also save the company and participants money, identify sub-standard service providers, and improve the plan design and features.

  1. There is a potential conflict of interest between your Third-Party Administrator (TPA) and the in-house investment advisor.

Despite recent technological advances and widespread access to low-cost index investing, many QRPs still include expensive mutual fund lineups or lack key elements of the major investment asset classes. A plan that has an average mutual fund expense ratio over 1% is probably paying too much.

These higher fees typically arise from an inherent conflict of interest when a plan chooses to bundle their TPA, investment advisor, and recordkeeper. (The term “bundle” means that all three roles fall under one company relationship.) Such combined services can allow potential conflicts to flourish — as the investment advisor may have in-house or proprietary funds to utilize inside of the plan. The real question becomes, “Is the advisor or firm paid more for having these funds inside of the investment lineup?” (The answer is often “yes,” especially when a lineup is lacking considerable low-cost options).

Trustees and managers of QRPs need to understand how each party is being paid, as that will often drive behavior. This information can easily be obtained through the annual 408(b)(2) disclosure required by the Employee Retirement Income Security Act (ERISA). Transparency of fees is vital in today’s regulatory environment.

  1. The plan is lacking a robust investment fund lineup, or the fund lineup is too expensive.

There is a fine line between not having enough investment options in a retirement plan and having too many. For example, having ten large-cap value funds on the platform doesn’t make a lot of sense considering the participants will have a difficult time choosing which one is right for them. On the other hand, offering only one fund is also a problem. As an example of a middle ground, a low-cost passive fund could be offered along with a more expensive actively managed fund that aims to outperform the underlying index benchmark. This approach provides each participant with the flexibility to choose the option that fits their comfort level. We also recommend that a plan’s fund lineup includes target-date retirement funds, which can serve as a one-stop investment option for participants.

  1. There is no co-fiduciary to share potential liability for the plan and its management.

Businesses and professional practices, as employers, have a fiduciary duty to their employees to prudently manage the QRP. If they do not, they can face significant liability. As just one example, The University of Chicago agreed to pay $6.5 million to settle a class action alleging that it failed its fiduciary duty to employees in ways that forced them to pay excessive fees in their retirement plan.

Moreover, such liability is typically not covered by malpractice or general liability insurance. Many QRPs elect to have additional fiduciary liability insurance. This additional coverage helps to protect the business/employer against claims of mismanagement of a company’s retirement plan(s). (Unlike a fidelity bond, fiduciary liability insurance is not required by ERISA or any federal statute.)

Given this potential liability for the business – and that any of the other three pitfalls could, in fact, cause such liability – adding a co-fiduciary to a QRP is highly recommended. This can be accomplished through a 3(21) co-fiduciary role or the 3(38) designation which provides sole discretionary decision making to a third-party investment manager. A 3(21) investment advisor works with the trustees of the plan to recommend the investment lineup for the plan but does not have discretion over plan investments. If you prefer to maintain control of your plan’s investments, you would want to work with a 3(21) advisor. If your goal is to fully limit your fiduciary liability, you would choose a 3(38) investment advisor, who has the discretion and authority to manage the fund lineup.

Best Practices

One important best practice to consider is the use of an “unbundled” investment advisor who is independent from the TPA and recordkeeper and can act as a co-fiduciary on the plan. This strategy can have the following benefits:

  • Ensures your advisors are co-fiduciaries and independent of the other providers on your plan
  • Helps to coordinate regular benchmarking on the investments/plan providers managing your plan
    1. Review fees and comparing them with industry standards
    2. Determine which fees are justifiable and which services bring value to the plan
    3. Monitor communications between third-party service providers and plan beneficiaries to make sure they receive advice that is in their best interest
  • Establishes a due diligence process for the investments inside of the plan
    1. Create a methodology to select investments and manage risks
    2. Review asset performances and potentially replacing assets
    3. Present educational sessions for the employees of the company
  • Identifies what needs to be disclosed to plan beneficiaries and how this information will be delivered to them
  • Keeps records of all communications and due diligence processes


To avoid common pitfalls and implement best practices for your QRP, it is imperative that you periodically have a third party perform an audit of the plan through an independent benchmark study – a fundamental step toward prudent QRP management and peace of mind for employers. In addition to presenting changes that can reduce fees, costs, and conflicts, this audit can help you reduce potential liability exposure for the business and its owners.

David B. Mandell, JD, MBA, is an attorney, consultant and author of more than a dozen books including Wealth Management Made Simple. He is a principal of the wealth management firm OJM Group, where Adam Braunscheidel, CFP® is a Wealth Advisor. They can be reached at 877-656-4362 or