By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA
401(k) plans are complex. The rules are hard to understand and they constantly change. 401(k) advisors help employers develop and maintain a plan that meets their needs, and they help participants make important decisions about saving for retirement.
It's impossible to know everything about everything. When setting up 401(k) plans, employers often find themselves overwhelmed. They know their business, but they don't know the intricacies of retirement plans and they don't have time to become an expert. As a result, they rely on 401(k) advisors to coach them and coordinate with other service providers.
While every 401(k) advisor is different, some of the most common services are described below.
A retirement plan requires ongoing attention. Service providers from a variety of fields (administration, recordkeeping, payroll, financial advice) need to work together to keep the plan in good shape. In many cases, the 401(k) advisor is a coordinator among these service providers.
When employers don't know who to call, they generally call the plan's advisor. Skilled 401(k) advisors know where to go to get problems fixed, and they can speak the language of payroll providers,third party administrators (TPAs), and recordkeepers. When employers have questions about their retirement plan, their first call is often to their 401(k) advisor.
A 401(k) advisor should help in the following ways:
Business owners and Human Resources personnel who develop 401(k) plans may be intelligent, but they may not have adequate training and exposure to the constantly changing world of investments. Unfortunately, these individuals can make themselves and the company liable for poor investments based on the decisions they make and information they provide to employees.
Good 401(k) plan advisors have experience and training to help employers make informed decisions. They perform the following functions:Develop an investment strategy that helps employers meet their obligations and manage fiduciary liabilityIntroduce programs that can improve the chances of employees' successfully saving for a comfortable retirement
401(k) advisors should regularly perform reviews of:
As part of the investment monitoring process, a 401(k) advisor works with and guides an employer's investment committee -- employees who ultimately decide on the plan's investments.
A robust investment menu is just one part of a successful retirement plan. Plan participants -- employees who contribute to the plan -- need to know how to use the plan. A good 401(k) advisor provides education to help participants improve the chances of a successful retirement and reduce fiduciary risk to the employer.
The best advisors and education programs:
Without education, employees may make mistakes that are easy to prevent -- if they even participate in the plan at all.
Employers that offer 401(k) plans take a risk. They take on fiduciary responsibilities -- they must act in the best interests of their employees. Since employers cannot know everything, they are allowed to hire consultants with specialized knowledge to help. 401(k) advisors help employers protect themselves by managing fiduciary liability and using systems to help employers meet their responsibilities.
The best advisors review the following at least annually:
A 401(k) advisor should regularly:
When new opportunities arise, as they sometimes do when laws change, your 401(k) advisor should let you know what is new, why it matters, and how you can take advantage of it if you want to.
401(k) plan advisors get paid one of two ways:
When employers pay for financial advisors, they typically write a check annually or quarterly. The fee may be based on services provided, or it may be calculated as a percentage of investment assets.
When employees pay for financial advisors, the fee may be paid as either a flat fee for services or an asset based fee. With flat fees, employees see a fee deducted from their account periodically (monthly or quarterly, for example).
Asset based fees come out of employee investments, and they may or may not be visible to employees as transactions in their accounts. Depending on the financial advisor, recordkeeper, and other vendors, payments may transparently appear as a line-item transaction. Other payments go to the advisor indirectly through the investment provider or recordkeeper. Indirect fees are baked into investment expenses (such as mutual fund expense ratios).
How Service Providers Get Paid from Plan Assets
If you don't know who your plan's advisor is, that's a bad sign. Good advisors reach out regularly -- even after a plan has been launched. The advisor, an employee, or a contractor should conduct enrollment meetings, meet with plan trustees at least annually, and be available for questions (from the employer and employees) when questions arise.
Justin Pritchard is not affiliated or registered with Cetera Advisor Networks LLC. Any information provided by Justin Pritchard is no way related to Cetera Advisor Networks LLC or its registered representatives.