If cutting out the middleman/middle woman reduces costs why should 401k advisors be any different? That thinking assumes that the function of the middleman/middle woman is unnecessary or can be done by one of the other providers or be taken on by the buyer. This assumes too that the buyer has experts. Walmart is known for its expertise in purchasing and supply chain management. Even they were ensnared by a lawsuit highlighting they had authorized excessive 401(k) fees in their 401(k) plan. Let’s examine what might be happening.
Does your 401k advisor really do everything?
When talking to plan decision-makers (execs aka fiduciaries) I am often told that their advisor does everything. Often that has to do with wishful thinking rather than careful monitoring. What is everything? Does it include provider monitor and employee education, etc.?
Many people including some brokers without specific retirement plan knowledge see the function of the advisors simply as providing a menu of investment options. They don’t intend to do any provider monitoring or administrative monitoring. Those two things are left to the plan sponsor or company who actually hired the broker in the first place. Jason Roberts of the Pension Resource Institute provides a useful framework for plan services: investment monitoring, provider monitoring and administrative monitoring.
401k advisors and service provider monitoring
Do you know how much each one of your service providers makes on your plan? I have not found a decision-maker who knows. The Department of Labor in 2012 required any provider making more than $1000 on your plan to disclose those amounts. I find that most decision-makers wear their company hat concerning themselves mainly with the costs the company pays directly. They do not concern themselves with uncovering and monitoring cost that the employees pay out of their account balance. That kind of thinking has gotten many a company in trouble when they lost lawsuits alleging improper monitoring of costs to the balances. In order to uncover these hidden fees the Department of Labor required the providers to make them transparent through this disclosure.
I typically find that service provider monitoring has not happened in the way that the law specifies that the plan sponsor should. For example, some platform providers provide direct access to the platform without the use of a broker or investment advisor representative. Does that mean that the cost of the advisor is removed? It does not. The buyer, you, me assume that would naturally happen but in a complicated pricing scheme for investments that does not have to be the case. Moreover, even if it is are you watching the costs of the other plan services.
I recently analyzed the plan that had direct costs and in direct costs charged by the platform provider. While the direct costs, the check that the company writes was about $3500 the indirect costs or about 300,000. Based on comparison to two other platform providers this was roughly hundred thousand dollars more than what these other two providers would have charged. The company was unaware that the platform provider was actually receiving any compensation over what they were directly paying.
401k advisors and administrative monitoring
There are many disclosures and plan documents that need to be made assessable to participants. Most sponsors I’ve talked to assume that their platform provider is simply handling it. An issue that I found extremely problematic is the one where they believe they’re getting the protection from 404C which part provides a safe harbor for the investment decisions being made by their participants (employees). So far, I have not met a chief financial officer or HR director that actually knows what is involved. A couple of told me that they simply filled out the tax form in the way that their predecessor did. If there are to be audited by the Department of Labor, they would be asked to provide evidence they had actually complied. This could lead to a much longer audit process which may uncover other plan deficiencies.
A fiduciary 401k advisors approach
imagine a situation where one 401k advisor acts as a fiduciary for the investment menu, one is a discretionary investment manager for your qualified default investment alternative, another for monitoring the providers and overall program in one that specializes in the administrative functions and finally one that acts as a fiduciary to the participants helping them develop a retirement savings and investing plan. This possibility exists today.
Let’s say that the cost of your entire program today is 125 basis points. You could hire a fiduciary adviser to help you design the plan and monitor the providers for say 25 basis points. They can help you find a fiduciary investment manager using low-cost investments of around 25 basis points and their fee of 25 basis points. You then could hire a fiduciary administrator for 10 basis points. This is hypothetical. You may incur some additional cost which should be weighed against plan and employee goals.
This cost should be balanced with the increased sophistication of using a professional investment manager that likely brings Chartered Financial Analyst, MBA and Ph.D. qualifications to portfolio construction. Ideally this means increased expertise that come from specialists rather than generalists like a CERTIFIED FINANCIAL PLANNER™ professional. Multiple fiduciary providers helps to vet conflicts that can non-fiduciary providers do not have to concern themselves with. This can easily happen when all of your providers are under the same corporate umbrella.
Learn more about our multiple 401k advisors approach to fiduciary risk here.
For Plan Sponsor Use Only – Not for Use with Participants or the General Public. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
Jason Roberts and the Pension Resource Institute are not affiliated with LPL Financial or Envision 401K Advisors.