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How do you, as a 401k plan sponsor, know if you are receiving good investment advice from your 401k plan investment advisor? That question is more difficult to answer for plan sponsors than it is for individual investors. Plan sponsors need to be more concerned about process than performance in order to fulfill their fiduciary responsibilities.

It is not necessary for plan sponsors to offer the best performing funds in their 401k plans. Rather, you should be more concerned that the process used to select and monitor the investment options offered is compliant and sound. With that in mind, outlined below are ways you can tell if you are receiving good investment advice.

You Are Getting Good Investment Advice If…

It is coming from a fiduciary

Your investment advisor is signed on to your 401k plan as a fiduciary, right? You should make sure. You should also determine whether your advisor is acting as a fiduciary without exception under the new fiduciary regulations. Many brokers, bankers, and insurance advisors are able to act as fiduciaries with certain exceptions (that are not in your best interest). Advisers who work for Registered Investment Advisory (RIA) firms have always been required to act as fiduciaries without exceptions. In other words, these advisers are required by law to provide investment advice that is in your best interest.

It includes discussion of 404(c) compliance and QDIAs

You want your 401k plan to comply with ERISA section 404(c) and also offer a QDIA investment option. Holding yourself out as sponsoring a 404(c) compliant plan allows a plan sponsor to be protected from lawsuits related to poor participant investment decisions.

Every 401k plan should offer a QDIA or Qualified Default Investment Alternative. This investment option is where participant contributions will be deposited if you do not receive investment elections. Plan sponsors enjoy “safe harbor” protection from participant lawsuits when they invest contributions without investment elections in a QDIA.

Your investment advisor needs to talk with your committee at least annually about whether your 401k plan complies with these regulations. Your plan should take advantage of these important legal protections.

It is comprehensive

Investment advice shared by your investment advisor should be comprehensive in terms of ensuring that investment tracks are available for all types of your 401k plan investors. Typically, a plan has four types of investors: 1. Core funds, 2. Do-it-for-me, 3. Index, and 4. Specialty. Your advisor should ensure that the right investment options are available to satisfy all of these investor types.

In addition, the investment advice you receive should be comprehensive in terms of ensuring that sufficient investment options are available to allow plan participants to diversify their accounts appropriately.

It demonstrates a sound process

Your investment advisor should demonstrate a thorough, prudent and understandable process for surfacing investment options for your investment committee to consider. At the very least, the reports presented should show performance, cost, and risk for the recommended options. Investment committee members should understand the reports and be able to follow your advisor’s logic in selecting a recommendation.

Keep in mind that advisors have varying criteria for evaluating investment options. For example, I try to identify options that display top quartile measures in the three criteria shared above. I also place a high value on investment options that have a downside capture ratio of less than 100% since participants worry a lot when markets fall. In 401k plans, it generally is better to offer more defensive investment options rather than overly aggressive ones.

Investment advice that fits your culture

Your advisor should understand you, your investment committee and your corporate culture well enough to introduce investment options that are appropriate for your plan participants. For example, I have some clients who refuse to offer real estate or commodities funds because they believe those asset classes are too volatile and subject to price fluctuations that are difficult to explain.

It includes proper monitoring

Your advisor should be presenting monitoring reports that everyone on the investment committee understands. Recommending sound investment options is important, and monitoring and ensuring that they remain appropriate is just as important.

I estimate that at least half of all investment committee members do not understand the monitoring reports their investment advisor shares with them at each review meeting. The theory that most advisors use is that sharing more information is better because they can never be accused of not paying attention to a specific measure. This often leads investment committee members to become confused about what indicators are important and what they are saying.

I believe that the advisor’s job is to present those indicators that are most appropriate for determining whether an investment option is doing what it should. By screening out the indicators that are just producing noise, top advisors make it easy for committee members to determine how a fund is performing.

The bottom line is that your investment committee should understand what your investment advisor is saying, doing and presenting all of the time. If that’s not how everyone on your committee feels, it might be time to look for a new investment advisor.


About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider 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 or visit the firm’s website at: Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

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.