You don’t want to buy a lemon for a used car, much less be fooled in your retirement plan selection. When I was studying for my MBA at MIT, I became fascinated with what is known as the lemons problem. It involves situations where one party in a transaction knows more than the other. Situations like buying used cars, homes and retirement plan providers. Clearly the one with more info can take advantage of the other party’s lack of knowledge.
Is your retirement plan selection an adverse selection?
Used car buyers tend to view all cars is being of “medium” quality. “Of course, after buying the car, the truth shines through.” Adverse selection arises when products of different qualities are sold at a single price because buyers or sellers are not sufficiently informed to determine the true quality at the time of purchase. As a result, too much of the low-quality product and too little of the high-quality products are sold in the marketplace.1
Making matters worse, you may assess quality by how big a company is in revenue or assets under management. You may pick the biggest of the lowest quality providers.
Used cars have a shorter feedback loop than a retirement plan. You may not know about the quality of your retirement plan selection until you get audited by the Department of Labor or you get sued by your former employees. Before these events you may believe that any bad retirement outcomes are the fault of the investment markets or your employee’s bad choices.
Does a request for proposal process (RFP) fix adverse retirement plan selection?
Using a request for proposal for retirement plan selection is common. One problem with request for proposal is that it assumes you know all there is to know regarding the criteria you should judge providers. In recognition of the lack of understanding of the retirement plan selection, some firms do an Internet search for a request for proposal template to help them select their 401(k) plan provider.
Typically the RFP responses are longer than the time you want to take to evaluate your providers. High quality providers may not fit the template. Instead they may unable to showcase the expertise that you and your employees may benefit from. Of course, when you download from the internet there is no warranty that it will find the best provider for you.
Getting “Lemon-aid” for your retirement plan selection
If you are a fiduciary, you should know they have been asking if fiduciaries have had any fiduciary education. One of the best places to get fiduciary education is through the Center for Fiduciary Studies. They confer fiduciary designations, such as the Accredited Investment Fiduciary. Given that you don’t have time for that, you can find a retirement plan consultant who has that designation. Retirement plan consultants might also be a Professional Plan Consultant™ or Qualified Plan Financial Consultant.
Retirement plan consultants with these designations can help you answer: What do you envision for your 401k? After helping you answer that question, educate you on your legal responsibilities to help your employees. They will then help you understand what your options are to encompass your vision and your responsibilities. If this process shows you need a RFP, they can help you write it.
You should be aware of provider fees. More importantly you should be able to show your plan is retirement outcome focused. While you may get a great deal on purchasing your car, if you’re constantly taking it to the shop you likely wish you had paid more to have a car that runs.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.
1 Microeconomics, fourth edition Robert and Dick and Daniel Rubin field, markets with asymmetric information