What is a Retirement Plan Fiduciary?

Preparing for retirement requires a comprehensive approach that can be more involved than what you have time or experience for. When putting away money in your 401(k), individual retirement account or pension, your money will often go further with the help of an advisor or manager. You might be leery about the idea of placing your future in someone else’s hands, but you need not worry if they are the hands of a fiduciary.

What is a fiduciary?

According to the Internal Revenue Service, a fiduciary is an individual or trust empowered and entrusted to make decisions on your behalf. When you hire someone to oversee decisions in your retirement portfolio, you are committing a fiduciary act. The person or group you entrust with your money is legally obligated to act only in your best interests.

The Department of Labor notes that a fiduciary must act in a way that minimizes your risk, which typically means diversifying your portfolio to reduce the potential of losses. They are also bound to avoid conflicts of interest — they would not, for example, invest your money in the hopes of secondary benefit for themselves or an unassociated party.

When you operate with a retirement plan fiduciary, you are protected by Employee Retirement Income Security Act. Per the DoL, ERISA stipulates that a fiduciary must act in good faith and is legally obligated to recompensate you for losses you might sustain through improper action.

In this sense, it’s possible that you can be a fiduciary for your own retirement plan. However, if you want to maximize your savings and minimize risks, you will want to place management responsibilities into the hands of a knowledgeable financial advisor.

The responsibilities of a fiduciary

Fiduciary responsibilities are strictly defined but provide enough flexibility that they can act on your behalf in a way that benefits you. According to the IRS, fiduciary responsibility includes but is not limited to diversifying investments in your retirement plan, acting in accordance to retirement plan documents and performing any actions that minimize losses.

As the IRS points out, fiduciary responsibility is defined by the action and the process rather than the result. If, for example, a fiduciary makes a decision in your best interest that doesn’t pan out as well as thought, they are not in violation of their responsibility. To ensure that all decisions are made in due course, a fiduciary typically documents all decisions made on your behalf and includes rationale for each choice.

What to look for in a service provider

If you contribute to a retirement plan through your workplace, the plan sponsor — your company or employer — tends to outsource fiduciary responsibilities to a third-party provider, according to Investopedia’s Julia Kagan. With an individual plan, the IRS notes that you have the fiduciary responsibility to select your own service provider.

Because finding the right service provider is crucial for the success of your retirement portfolio, the IRS recommends doing thorough investigations into possible candidates and documenting the process as you go. Things to look for include whether a provider has fiduciary liability insurance and whether it has been involved in any legal action or litigation. After you’ve selected a provider, the IRS recommends being thorough in your follow up by checking reports, monitoring fees and reviewing overall performance,

Saving for retirement can feel overwhelming, but a fiduciary allows you to feel like you have a hand in the uphill battle. Researching potential fiduciaries and service providers and understanding their role in your future puts you on a better path to enjoying your golden years.

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