How to select a 401k Advisor – is harder than it may sound. However, there are steps that you can follow to make the process simpler and more fulfilling.
Most retirement plan advisors deliver value well beyond what many retirement plan committees and plan sponsors assume. Many fiduciaries who select a 401(k) advisor will think primarily of investment selection and investment management advice. However, most advisors will also handle behind-the-scenes administrative tasks, tax reporting, retirement planning, auditing, compliance, and employee education. Those are just a few of the hats worn by a typical 401(k) advisor.
Fiduciaries who select a 401(k) advisor to partner with will be making a wise decision for retirement plan committees and sponsors. That said, there are many advisors out there vying for retirement plan business, and not all of them have the experience necessary to adequately serve a 401(k) plan. So fiduciaries must exercise caution when vetting potential advisors. How do you differentiate the best from the rest? Start by asking the right questions, such as the following:
- Are you a fiduciary? If the answer is anything other than “yes,” that prompts the question, “Why not?” Fiduciaries are legally required to put your plan and your plan participants interests before their own. Or, before the interests of their own firm. If your advisor isn’t a fiduciary, you or your retirement plan committee could end up absorbing that total responsibility. They will also be retaining the legal ramifications that go along with it. While retirement plan committees play a significant role in plan governance, the 401k advisor can help by absorbing some of the plan’s fiduciary duties. When an advisor tells you they are serving as a plan fiduciary, it means they have agreed in principle and in writing that they are willing to take on that responsibility and the associated liability.
- What investment choices are available? Is the advisor advocating for low-cost index funds or index-style ETFs, or are they pushing high-fee investment choices? The difference is advisors can collect a commission on high-fee mutual funds, while they typically don’t with low-cost funds or ETFs. Historically, low-cost funds tend to perform better resulting in more favorable retirement plan outcomes. Lower-fee investments are less expensive to own, which means they take a smaller bite out of participants’ savings over time.
- What fees will I pay? Many 401(k) offerings have steep, hidden fees that are often embedded in investment expense ratios. In addition, some firms charge those fees but offer no planning help or advice. This results in creating confusion and potential for financial mishaps among plan participants. Your advisor should provide you a transparent breakdown of costs and compensation structures. You should also be able to clearly discern value for fees paid. This includes fund manager and recordkeeper fees.
- Is planning included? While many retirement plan advisors tend to rely on automated dashboards and calculators as planning tools, these aren’t enough. Depending on their level of fiduciary responsibility, your advisor should provide timely and relevant investment management and selection advice at a minimum. When it comes to investment advice for participants, the Department of Labor is explicit that retirement plan committees and fiduciaries ensure participants have access to adequate information about the funds in the plan. The two questions fiduciaries need to answer are:
- 1) If participants make their own investment decisions, have you provided the plan and investment related information participants need to make informed decisions?
- 2) Have you provided sufficient information for them to exercise control in making investment decisions? Clearly, this requires a higher level of service and education from your advisor, so it’s important to understand at the outset what level of advice they will – and won’t – offer participants.
- Are all of your service providers functioning in the best interest of your plan participants? The company monitoring your plan should be qualified and have the expertise necessary to provide the support you need. This is often not your advisor, but a team that works with them. Your service providers should be able to support you during plan audits. While large company retirement plans must undergo a yearly audit, that’s not always the case with smaller plans. That means you must be ready for an audit at any time. Although this isn’t something your third party administrator can do on your behalf, they can help you stay prepared. “Audit readiness” includes keeping plan information up to date and being able to produce plan documents. You always need to be able to demonstrate that you’re following your plan document!
These five questions are a great starting point for getting to know a potential plan advisor. Always ask additional questions based on your plan’s specific needs. When fiduciaries select a 401(k) advisor, it is critical to find the right match so you and your retirement plan committee can get the support you need to help ensure your plan is a success.