Each year retirement plan sponsors should take time to evaluate their providers. Included in this group is your 401k investment adviser. Most plan sponsors use an investment adviser to help them with their 401k plans. This is a smart decision since many advisers are able to save plan sponsors at least as much as they charge. How can you tell if you are working with the right 401k investment adviser?
Sign-on to your plan as a fiduciary
Regardless of what the final Department of Labor (DoL) regulations say about adviser fiduciary responsibility, you should not hire or continue to work with an adviser who will not sign-on to your plan as a fiduciary. In addition, you should expect to receive the services outlined here.
Have a clean background
Studies have shown that investment advisers who have been sued in the past are likely to be sued again in the future. You shouldn’t work with problem advisers. Check the background of your investment adviser, or an adviser you are thinking of hiring, using BrokerCheck. BrokerCheck is a free service provided by the Financial Industry Regulatory Authority (FINRA), a financial industry regulatory agency under the direction of the Securities and Exchange Commission (SEC). A violation you find on the BrokerCheck website for your existing adviser should cause you to begin searching for another. Similarly, any violation should cause you to drop an adviser from the list of advisers you are thinking of hiring.
Do not accept soft dollar payments
Soft dollar payments are received by some advisers from mutual fund families. Consider only those advisers who practice fee transparency. These advisers will produce a bill for you each quarter for the services they provide. Their only source of revenue is the fees they receive from their clients.
Don’t hire an investment adviser that is also an asset manager or recordkeeper. For example, many employers use mutual fund companies as their investment adviser as well as asset manager and/or recordkeeper. No surprise, these investment advisers tend to overuse the investment funds their mutual fund family offers. These types of advisers have a conflict of interest which compromises their objectivity. As a result, following their recommendations may be a breach of your fiduciary duty.
Work for investment advisory firms
This may seem logical, however, there are a lot of plan sponsors that hire accounting firms or banks to provide 401k investment advisory services to their retirement plans. Hire a professional who works for a firm whose core business is providing investment advice. There is a major difference in the quality of advice you will receive.
Work for RIAs
I admit that I am biased since my firm is a Registered Investment Advisory (RIA) firm. RIAs are different from brokers. A RIA is required to put a client’s best interests first and act as a fiduciary with regard to any recommendations shared. Brokers work for their brokerage firms, not their clients. We have been assured that the DoL’s final fiduciary regulations will provide loopholes for brokers to escape their fiduciary responsibility. Simplify the issue so you don’t have to worry about loopholes. Hire a RIA.
Investment adviser able to work with everyone
Many employers use investment advisers who are required to recommend proprietary products or who aren’t able to work with the entire universe of investment options (there are more than 30,000 investment options!). Investment advisers who work for brokerage firms or mutual fund companies fall into these categories. They are conflicted. Hire an adviser who has no conflicts of interest and will make the best recommendations for your plan and participants.
Finally, the SEC has put together a nice list of questions that you may wish to consider asking a prospective or existing investment adviser. Good luck with your evaluation!
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.