The most popular way for Americans to save for their retirement for the last 25 years has been the company sponsored 401(k) Plan. Long gone are the days of pension plans filling the gap between social security and the income we need at retirement.
Pension plans are not only costly for companies to fund – they are, after all, a liability on the company’s balance sheet. And, they are expensive to operate. Pension plans require actuaries, consultants, advisors, trustees and PBGC insurance (an insurance program all pension plans pay in to that provides “bail out” for pension plans that can’t meet their liabilities).
Pension plans pay substantial fees to advisors and consultants to analyze the plan’s assets, select investment managers and in some cases, direct how the money is invested. As companies shifted away from pension plans to 401(k) plans in droves, these same consultants and investment advisors found themselves out of work.
With 401(k) plans exploding, advisors soon recognized that they could sell the same services to the 401(k) plan market as they did to the pension market. Even though a 401(k) plan’s investments are participant directed and pension plans are company directed, advisors have convinced 401(k) plan sponsors that their services were critical to the plan’s success. They sold their “expertise” regarding investment monitoring and selection and knowledge of investment fees and trends.
They received a huge boost to their sales pitch when the Department of Labor suggested guidelines that 401(k) plan sponsors could adopt that could lessen the plan sponsor’s fiduciary liability (read “chances of being sued by the participants”). These guidelines, referred to as “safe harbor” provisions, suggested that if employers followed these recommendations, they could mitigate, but not eliminate, their chances of being sued for the performance of investments in their plans. The safe harbor provisions urged plan sponsors to:
1. Provide employees with information and education about the plan and the investments
2. Establish a written policy for evaluating the plan’s investments and monitor the investments in the plan as a “prudent person” would – replace funds that were not performing well, etc.
3. Provide employees with a minimum of 4 different investments to chose from
4. Provide employees with access to their accounts and the ability to manage their investments
These guidelines were the basis for the explosion in the last 20 years of advisory services marketed to 401(k) Plans. Nowadays, it’s not uncommon for a 401(k) plan with as little as a few million dollars to have an advisor affiliated with the plan. Naturally, the larger the plan, the more likely it employs at least one advisor or in many cases, an entire team of advisors.
While advisors can serve as advocates for the plan sponsor when it comes to analyzing the investments and fees, in the current environment of fee transparency and liability, it makes sense to ask: What’s your advisor really worth?
In our next article, we will offer an insider’s view of the world of the retirement plan “advisor”, including some insights they might prefer plan sponsors didn’t know.
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