How to Compare 401(k) Advisors
Are you looking for a 401(k) advisor, or thinking about upgrading your existing retirement plan advisor? Wondering how to compare different local advisors – or even understand the types of financial advice that you are encountering in your search? Let’s discuss.
Why even look at advisors
Maybe you already have one of the top small business recordkeepers and a Third Party Administrator, but you could use some help with investments and plan design. Or maybe your employees are complaining about their investment options or the costs of your company’s plan. It makes sense to add an advisor if your company’s 401(k) is growing and hasn’t been reviewed by an independent advisor. And it also is a good idea to periodically review all aspects of your plan every few years, to make sure that you are not overpaying, benchmark your 401(k) fund lineup, and make sure you are not missing important compliance or tax items.
We recently Googled “401(k) advisor” and got 2.5 million results. So even if you’re in the market for a consultant to help improve your plan, or are just looking to compare your current 401(k) advisor, it’s not easy knowing where to start.
401(k) Advisor Evaluation Resources
To help you begin the process, we recommend two great resources. The first is the 401(k) Advisor Shopping Checklist, which you can download here. The checklist is ideal as you interview potential consultants because it lists the most critical questions to ask to find the right advisor for your firm.
The second resource is a request for proposal (RFP) template that you can download here. This resource is filled with tactical, actionable ideas that you can implement in your own business to compare your current 401(k) advisor against modern retirement RIAs, and guide you in a process to evaluate consultants. After the intro, the 401(k) RFP includes a section where you can share information about your plan with prospective advisors so that they can tailor their responses. Then, the main section includes a detailed list of specific questions to be completed by advisors. We believe that this RFP will help you compare 401(k) advisors and understand which RIA is right for you.
Before addressing the RFP it may be helpful to review the different types of financial advisors in the corporate and non-profit retirement planning space. Not all retirement company’s motivations are comparable, mainly driven by the type(s) of compensation that they will receive from your company and your employees.
The three main type of 401(k) advisors
- Fee-based Financial Advisors. While the description sounds simple enough, these advisors are actually a type of hybrid when it comes to the source of their revenues. That’s because they can earn fees from managing their clients’ assets and they can earn commissions on products sold to their clients. For example, they may receive compensation from mutual funds when purchased on behalf of a client. This dual revenue source can be confusing for clients. Clients should have a clear understanding of the source and amount of fees when doing business with fee-based advisors.
- Fee-only Financial Advisors. These firms have a fiduciary responsibility to act in the best interest of their clients. They are paid for their services only. That means they don’t accept commissions for selling products so they are likely to have fewer conflicts of interest than fee-based advisors. They may work for independent financial planning firms and are not tied to a particular product line. They are registered and regulated by state agencies and the SEC.
- Insurance agents and brokers. These advisors are often compensated based on the products they are able to sell to clients. In fact, they may have an incentive to sell products originated by their employer even if another product is a better fit for their client. A person who workers for a brokerage company may also be referred to as a registered representative or account executive. Learn more about how to spot the difference between a broker and a fiduciary here.
Get the info you need to compare 401(k) advisors with the RFP
Sometimes it seems that nothing is simple when it comes to running the company 401(k) and selecting an advisor may fall into that category. But our RFP gives you a tool to learn much that you need to know about a potential vendor, from their business model to the average expense ratio of the funds in their lineup.
Our advisor RFP starts with helping you learn the background of their firms, including their tenure in the 401(k) business. We suggest you take particular note of the number of retirement plans that they currently advise and the percent of their business that is managing 401(k)s and 403(b)s. This is because there are many financial advisors who moonlight in the retirement space, but who are generally referred to as “blind squirrel” advisors – consultants who, according to InvestmentNews, fall outside the “realm of minimal qualification.” As InvestmentNews states, “225,000 emerging advisers falling outside the realm of minimal qualification are either “accommodators,” working on an important wealth-management client’s plan to keep other advisers out, or “blind squirrels” — the proverbial brother-in-law, son-in-law or college roommate of a company CEO or other decision-maker.”
The fee section of RFP allows you to understand all of the hard dollar costs the RIA will charge. In addition, be sure to understand if the plan sponsor or the participants will pay each particular charge. The RFP’s list of asset based fees will allow you to separate fund expenses from other asset based charges. This section also will allow you to see if the consultant accepts any revenue sharing or 12b-1 fees which can create a conflict of interest.
With the details from this breakdown, you should be able to compare costs across advisors.
Fiduciary Responsibilities for your 401(k) Plan
Another key section of the RFP asks the advisor to spell out which fiduciary responsibilities they are willing to take on. Remember, if they are a 3(21) investment fiduciary, that means you remain on the hook for the liability associated with the investments in the plan. The RFP can also help you document other areas of fiduciary oversight. For example, does the consultant determine employee eligibility, monitor payroll contributions, or review and sign the form 5500? You will know after reviewing the RFP.
Employee education and service
The RFP even has a section to help you understand how the advisor would assist your employees with their 401(k). For example, do they offer personalized savings advice or investment advice? Can they email balance updates? What about offering investment advice tools participants can access from their mobile devices? Effective employee engagement can be a critical factor when it comes to ensuring widespread participation in the plan and high salary deferrals.
Their success so far?
Speaking of participation, a key metric when comparing advisors is the participation and savings rates of their average client. This is critical information that can help you determine if they are a good fit for your company’s 401(k).
ForUsAll responses to the RFP
As you are awaiting responses to the RFP, you may be interested to learn that ForUsAll’s average mutual fund fee is 0.12%, with an all-in asset fee of around 0.52%. And when it comes to fiduciary services, we’ve got you covered. ForUsAll can serve as your 3(21), 3(38), or even 3(16) fiduciary as a fee-only fiduciary. Remember, the fiduciary role your advisor plays also determines your role as plan sponsor.
Unlike traditional 401(k) advisors, ForUsAll takes on both the 401(k) investment and administration responsibilities – so that smaller companies can reduce the liability and workload associated with offering a retirement benefit. As an independent 401(k) advisor, we take pride in offering low-cost, high-value retirement plans.