The financial services industry has largely normalized compensation arrangements that create conflicts of interest. Other professional fields—tax and legal—figured this out long ago and largely avoid them. Plan sponsors should understand why that matters.
A recent white paper from Francis LLC, a retirement plan consulting firm, by Michael J. Francis, Esq., examines how common investment adviser compensation structures can create conflicts that undermine retirement outcomes and increase fiduciary risk. The cost isn’t theoretical: the Council of Economic Advisers estimated more than a decade ago that conflicted investment advice costs investors around $17 billion a year in unnecessary investment expenses—a figure likely understated today. Research has found that investors receiving conflicted advice earn roughly one percentage point lower annual returns over time.
The paper identifies several conflict areas plan sponsors should understand—and offers practical guidance on what to do about each.
Asset-based fees are common and legal, but worth scrutinizing. The adviser’s compensation grows with plan assets regardless of the work performed—a situation courts routinely discourage for legal and tax advisers. In some cases, it may be in the plan’s interest to choose a course of action that reduces assets (like promoting Roth accounts for younger workers), but an asset-based adviser has no incentive to recommend it. The fix: reserve asset-based fees for advisers with discretion who are being paid to outperform a specific, meaningful benchmark. Otherwise, fund selection, performance monitoring, and asset allocation advice should be paid on an hourly or project basis.
Managed accounts often have investment expenses that are 2 to 5 times higher than those of target-date funds, even though their purpose is similar. Advisers may increase their own compensation by recommending managed accounts over simpler, lower-cost alternatives. To justify the higher expense, a managed account should demonstrate a track record of performance superior to low-cost TDFs—and claims about increased savings rates or better risk alignment should be evaluated separately, since both can be achieved more cost-effectively with the help of an hourly-paid adviser.
ERISA 3(38) fiduciary services are often pitched as liability-reducing, but they don’t eliminate the sponsor’s monitoring duty. A sponsor that lacks the expertise to evaluate a 3(38) adviser’s performance may need to hire an additional 3(21) adviser—potentially offsetting any cost savings from the arrangement.
Third-party compensation—revenue sharing, referral fees, finder’s fees—can influence which providers or investments are recommended, even when fully disclosed. When hiring an adviser for any search, the paper recommends requesting a written acknowledgment that the adviser will act as an ERISA fiduciary throughout the process. If the adviser refuses, it’s likely because it plans to receive some form of compensation from the providers it recommends.
Participant advice with a wealth management agenda creates its own risks. Advisers with a retail business may steer terminating employees toward IRA rollovers with higher fees—often significantly more expensive than the institutionally priced investments inside the plan. The paper cautions that inserting non-solicitation language into a contract doesn’t solve this problem. It tends to encourage advisers to focus on high-wage earners and large account balances while effectively ignoring everyone else. Instead, sponsors should seek participant advisory programs with strong educational components and, if they choose to offer advice, services that do not allow the adviser to influence their own compensation through recommendations to participants.
Simply disclosing a conflict doesn’t make it go away. Research suggests disclosure may not meaningfully reduce bias—and in some cases may make it worse if advisers feel they’ve “checked the box.”
The goal for plan sponsors isn’t just to find advisers who disclose conflicts—it’s to evaluate whether those conflicts are manageable and whether their consequences are acceptable.
