The second major part of a retirement plan’s cost to your company and employee participants is the cost of having an Investment Advisor assist your company in establishing, managing and monitoring your company’s 401k or Profit Sharing Plan. As the Plan Sponsor, this is not as simple as it may first appear. “By not hiring investment advisor, we will save the company and the participants fees that can amount up to 50% or more of the total cost“, is the primary reason companies decide to just go with a service provider. This is the one major advantage of not hiring an investment advisor to help put together your company’s 401k.
Lets go over some of the disadvantages:
- Limited investment choices – most 401k providers can provide a plan directly to your company without an advisor. However, these plans are “turnkey”. The plan you are offered often has little to no choice in investment options. These plans also tend to contain a lot of average funds, both in terms of costs (average or higher than normal) and performance (funds that often underperform their benchmarks). I discussed this in some detail in Part I: Investment Option Expenses – Is the issue just the cost of the funds or is there something more to it?
- No ability to remove and replace under-performing fund choices. This is one aspect I take very seriously – if a fund starts to underperform and there is no valid reason for it, I will replace it with a better option for my client plan sponsors and their particiapants.
- No investment advice or education for your employees often leads to lower participation and lower savings rates. For example, an international HSBC study, The Future of Retirement, in 2011 showed that those with financial plans accumulated nearly 250% more retirement savings than those without a financial plan in place. Furthermore, nearly 44% of those who have a financial plan in place save more money each year for retirement.
- In fact numerous surveys all suggest that participants do in fact want advice and help in managing their retirement plan. The following article, 401k Trends: Employers Respond to Workers’ Desire for Advice, Personalized Education, Improved Plans discusses many studies done by multiple sources all coming to the same conclusion – a disturbing majority of plan participants do not understand basic investing concepts and feel overwhelmed when it comes to making decisions regarding their retirement plan. To be sure, some do use self-help tools (some provided by service providers) to educate themselves to make more informed investment decisions, but most studies show that participants that have access to investment advice feel more confident in their future with regard to their retirement accounts.
- Costs are certainly major determinant of how a participant’s portfolio performs – but a study by Brinson, Hood and Beebower, “Determinants of Portfolio Performance” (1986, 1991) argues that investment policy (asset allocation) accounts for 94% of the variation in returns in a portfolio. Properly allocating portfolios with re-balancing and fine tuning over time are by far the key to realizing good investment results over the long run.
- Lastly, Plan Sponsors do not gain any fiduciary protection by providing a plan with no investment advice. ERISA – The Employee Retirement Income Security Act – is the Federal law that sets standards of protection for individuals in most voluntarily established, private-sector retirement plans. An excellent piece regarding various levels of Fiduciary Protection was published by Benefits Magazine: Are Your Service Providers Fiduciaries of Your 401(k) Plan? Firstly, it should be noted that if you do hire an investment advisor in any capacity, it still does not fully relieve you as the plan sponsor of your fiduciary responsibility to monitor the overall plan and the advisor. However, not hiring an advisor in some capacity puts you as the plan sponsor in a much more exposed position with regards to managing and monitoring the plan. By hiring an advisor you are partially shielding yourself by relying on the advisor to provide prudent advice and guidance to both you and your employees. By the way, I would note one thing that is very clear in this article – an advisor that offers to help you run your 401(k) for free so that they have the chance to offer additional services to your employees does not provide any fiduciary protection whatsoever. I bring this up because I have noticed that some advisors are doing just that – and this does not even take into account a potential conflict of interest you could be held liable for. In order to receive some level of protection, Section 3(21) (A)(ii) of ERISA identifies a fiduciary as someone that “render[s] investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan”. There are different levels of Fiduciary Protection outlined in the article, but the bottom line is an advisor assisting you in managing the plan and helping your employees for free provides you with no protection at best and could expose additional liability at worst.
Trying to determine what is the best plan structure, selecting the best investment options and helping employees figure out how they should invest their retirement plan savings has become more and more complicated over time. Volatile markets over the last 15 years have eroded many people’s confidence in their ability to effectively manage their investment portfolios. In response, service providers and online investment information sites provide many tools to help people educate themselves to make better investment decisions. However, it seems clear that many people want help when it comes to making decisions about their investments. This combined with the ability to hand select the best investment options, gain some fiduciary protection, and ensure you have a plan structure in place that meets all of your company’s needs makes a strong case for hiring an advisor to help you with your company’s 401k. As always, questions are comments are encouraged – and if you have a specific question about your plan please don’t hesitate to to call me at 760-755-7799 or email me at firstname.lastname@example.org