Five Reasonable Expectations to Have of Your 401(k) Adviser
The business owner who wants to build a successful business may offer a 401(k) retirement plan to his or her employees as a benefit. While this is a great tool to attract talent, it also gives the business owner another hat to wear: that of Trustee of the retirement plan. Over the years, a combination of regulations and lawsuits has changed the 401(k) fiduciary landscape, making fiduciary responsibilities more complicated. At the same time, there are more tools available for business owners to develop and offer 401(k) plans that are customized for the business. However, business owners have neither the time nor the expertise to ensure they are keeping up with these matters, whether it be regulations, administration or evolving options. To that end, we believe that an essential “tool” in the business owner’s toolkit should be an experienced 401(k) advisor.
An advisor can oversee the various aspects of running a 401(k) plan, taking the bulk of the workload off the shoulders of the business owner. Let’s look at five service issues (in no particular order) a business owner should expect from their 401(k) advisor.
1. Plan Design. There is a spectrum of reasons business owners decide to offer a 401(k) plan, ranging from maximizing what they themselves can save to maximizing what the employees of the business can save. We find most fall somewhere in between, with the goal of accomplishing both. The advisor has resources available that can help design or review a plan to match the desires of the owner within fiduciary law guidelines.
Example: It’s not pleasant when a business owner or leadership team has to take back personal contributions they made to the plan. It’s worse when there’s a fine just for trying to save. A properly designed plan can help avoid this.
2. Investments: Choices and Quality
Choices: There was a time when a plan was as simple as three investment choices: a money market fund, a stock fund and a bond fund. Today, investment choices have grown to include sub-categories of these three choices; the problem can then become too many choices instead of too few. With too many choices, employees may give up trying to understand all the options and opt out of saving at all.
Example: A business owner came to us for a 401(k) plan consultation. She was concerned about the lack of participation of employees and wanted to find a way (or ways) to increase participation. On review, we found over 90 investment choices in the existing plan. This was overwhelming to most employees and rather than sift through the many choices, they chose not to participate. By eliminating most of the funds and selecting more appropriate or better suited funds, we built a simplified and easy-to-understand selection for the business to offer employees.
Quality: Is your advisor monitoring the ongoing quality of the investment choices in your plan? The quality of funds can change. This can be anywhere from a deterioration of performance to a change in the fund’s management team to drifting away from the stated investment style.
3. Education. Your advisor should provide you with a game plan for getting the message out and a strategy for educating employees throughout the year about the benefit you are providing. Further, your advisor should include in the search for the 401(k) provider criteria that matches the sophistication and engagement level of your employees with the provider’s approach to education and engagement.
Example: The company mentioned earlier had a 25% participation rate in their plan. Once the original advisor “sold” the plan to the business owner, he did not return to provide any education for the employees…for seven years! After our first education meeting, enrollment doubled to 50%.
4. Fiduciary Liability: In 2013, the Employee Benefits Security Administration agency (part of the Department of Labor) closed 3,657 civil investigations resulting in almost $1.7 billion in corrective actions. Your advisor should be able to help with compliance oversight by working with you to set up the right service team to avoid any issues.
Example: The original advisor of a 401(k) plan never let the company know a fidelity bond was required. While a simple part of a 401(k) plan, this can be a costly oversight.
The good news is that there are now services available that will help take most of the fiduciary responsibility off the shoulders of the business owner.
5. Fees. Last, but certainly not least, fees should of course be considered. Don’t confuse inexpensive with value. Your advisor should be able to benchmark how your fees compare to plans of similar size. This includes the advisor’s fee.
Example: While reviewing the plan in one of our earlier examples, we found several of the fees were outdated (meaning too high). This included the advisor fee, third party administrator fees and fees paid within the investment choices.
Sometimes an investment with a higher management fee may be recommended. Stronger historical performance, a stronger management team or a lower level of risk than the current fund can justify a higher fee within a fund.
If you are an owner or leader of a business and are not receiving the above five services from your 401(k) advisor, it may be time to consider a change. Look for an advisor that is independent and conflict free. An independent advisor does not have a proprietary product to push. Further, use an advisor that is fee-only and not compensated by commissions, as this helps minimize conflicts of interest and puts your company’s interests first. Consider a Registered Investment Advisor (RIA). These are advisory firms and individuals who are registered under the Investment Advisor’s Act of 1940.
Smith & Howard Wealth Management fits all of these criteria with the added benefit that we will stay with you every step of the way and will be in contact with you throughout the year, not just at enrollment time.
If you have any questions regarding 401(k) plans or would like a review of a current plan, contact your Smith & Howard Wealth Management advisor or Rob Kaercher at firstname.lastname@example.org.
All references in this publication referring to our average allocation or “typical portfolios” reflect those of the fully discretionary accounts of clients with moderate risk profiles. Actual client portfolios are tailored to individual client circumstances and asset allocations may vary. Any reference to returns reflect the performance of asset classes, are for illustration purposes only, and do not reflect the returns of any specific investment of Smith & Howard Wealth Management. No representation is made that any investment decisions discussed herein have been profitable in the past or will be in the future. Past performance is no guarantee of future results. A list of all recommended investments is available upon request.