My Cousin, My 401(k) Plan’s Financial Advisor

I have some simple rules to live by. I never bet on the Mets, eat Kosher Chinese Food, or do business with family.

Yet I have come across so many financial advisors who bemoan to me that they couldn’t net a new retirement plan client because the current broker/advisor is someone’s relative.  Since when did running a 401(k) plan all of a sudden become someone’s patronage mill for family members.

Seriously, being a plan sponsor or a plan trustee is a tremendous responsibility and must act in a prudent manner. All plan providers must be screened carefully through a process involving the interview of other competing plan providers. Simply handing the role of financial advisor to someone who is related to one of the plan’s decision makers or participant may be a breach of the fiduciary’s duty of prudence in selecting a plan advisor.

Being a plan fiduciary bears a tremendous amount of responsibility. It requires the retention of responsible plan advisors, monitoring those advisors, monitoring plan fees, shopping the Plan to determine whether plan fees are reasonable, working on an investment policy statement, review of plan investments, and ensuring participant education. So why would a plan sponsor and/or plan fiduciary by hiring a financial advisor or any type of service provider because that person is someone’s cousin? There are quite a few hundred of thousands of financial advisors not related to anyone who will works for the plan sponsor, so I would recommend hiring someone who is not related to anyone connected with the plan sponsor.

For fair disclosure purposes, I am not the ERISA attorney for any plan where the plan fiduciaries or participants are related to me.

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2 Responses to My Cousin, My 401(k) Plan’s Financial Advisor

  1. Mario Lepore II says:

    This is a great article and in my opionion long overdue. This is a constant problem here in Michigan as I’m quite certain it is all over the country but I wonder if you could do a follow-up to this and discuss some of the pitfalls or penalties for this type of fiduciary breach.

    In my experience its not just family members but the college roomate or friend of the families son who is trying to get started in the business.

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