Many business owners think about their 401(k) adviser as primarily focused on investment selection — which funds to buy and why, like a stockbroker might do.
They tend to miss the rest of the iceberg under the water: administrative tasks, tax reporting, retirement planning, auditing and compliance, employee education and more. Aside from a few online tools and generalized advice, investment brokers rarely take responsibility for your plan and its outcome.
That’s why it’s important to know what you should be getting in a 401(k) adviser and how to differentiate the best offerings from the also-rans who claim to provide the same service levels. It pays to compare costs apples-to-apples based on those expectations.
Does your plan fit your business size, for instance? Are the investment choices on the menu relevant to you and your employees? What do those funds cost? Is the service you will be getting personalized and truly engaged, or just another call center staffed by inexperienced, recently licensed agents?
Ask the following five questions of any 401(k) provider who pitches you on their product, in writing if possible. The answers you get could make a huge difference to your business and your own retirement years down the line.
Question No. 1: Are you a fiduciary?
A lot of companies toss around unrelated marketing terms such as “wealth management” and “unbiased advice” but the one that matters legally is “fiduciary.” That word has legal teeth. In plain English a fiduciary is required to put you and your company’s interests ahead of their own and ahead of any company for which they work.
Just ask “Are you a fiduciary?” If the answer is anything less than “Yes, of course,” that’s a red flag. Many business owners end up acting as their own fiduciary because they don’t understand the liability in doing so. Outsourcing your plan to a fiduciary regulated by the Securities and Exchange Commission means the plan provider has passed a checklist test of duties and that they are willing to be liable for their accuracy.
Question No. 2: What are my investment choices?
Many investment firms are not in the financial advising business. Really, they are in the product selling business. The products typically are high-fee mutual funds. Those fees are high because a portion of what you pay is paid back as a commission to the adviser who suggested the fund.
As a result, conflicted advisers avoid low-cost index funds and index-style ETFs because they can’t collect a commission on them or because they simply aren’t available. This is often because the provider is an insurance company or because the provider wants you to use their in-house funds instead. Nevertheless, low-cost funds typically perform better over the long run because they are cheaper to own.
Question No. 3: What fees, all in, will I pay?
The big problem with legacy 401(k) offerings is the layers upon layers of fees, most of them embedded in products or hidden in fine print. Too many people think that they pay nothing for their 401(k) plan when in fact they pay a lot, year in and year out.
Even “zero fee” products you find at some of the big brokerage products are in fact costly because of the way those firms manage your cash. Many stockbrokers charge high fixed fees and then provide almost no ongoing help or planning.
Your plan adviser should give you a very clear menu of costs and a detailed explanation of who is compensated, and you should be able to recognize value for any fees paid in, known as the level fee. That includes fees charged by fund managers and your plan’s record-keeper.
Question No. 4: Is planning included?
Don’t let this go at the level of an online dashboard and some calculators. You need and deserve investment planning help on a timely basis, and that should be included.
In fact, the Department of Labor asks owners this: “If participants make their own investment decisions, have you provided the plan and investment related information participants need to make informed decisions about the management of their individual accounts? Have you provided sufficient information for them to exercise control in making investment decisions?”
Obviously, this level of education goes far beyond a basic self-service offering.
Question No. 5: Are your service providers looking out for you?
Make sure the company overseeing your plan’s management and compliance matters is qualified and experienced. Often, this is not the adviser but a team of people working with your adviser. Audits for example, can be a big issue.
Companies above a certain size must do these annually. But companies falling underneath the required annual audit size still need to be prepared for a visit, making “audit readiness” a very real thing. This prudent posture isn’t something a third-party administrator can conduct on your behalf.
Audit readiness means keeping files current, being able to produce specific plan documents on demand and following the provisions in your plan document, as well as having evidence of investment committee meetings, annual plan reviews, investment benchmarks, enrollment meetings, fee reviews and more.
If you aren’t equipped today for such a visit, it’s past time to get your ducks in a row — before an audit happens.