401(k) Financial Advisors: Core Responsibilities & Risks

If you’re looking into a 401(k) financial advisor, you probably want some qualified help navigating your 401(k) investment and asset management. But you probably also have a few questions.

What can an advisor do to actually help my business or retirement plan?

What are the benefits?

Who should I consider hiring for this?

Is a 401(k) financial advisor even worth the money?

And not all 401(k) financial advisors provide the same level of service or investment management responsibility. Nor do all advisors assume the same level of legal liability for ensuring their work meets ERISA fiduciary standards. All of that means getting or even knowing what you need from an advisor can be frustrating and difficult.

But it doesn’t have to be that way.

We’ve consolidated what you need to know about 401(k) financial advisors into a quick and easy guide.

Starting with...

What Can A 401(k) Financial Advisor Do For You?

You might be surprised at the amount of administrative work and financial risk that a good 401(k) financial advisor can shoulder for you.

Here’s what a 401(k) financial advisor can do for your business:

• Consult on 401(k) plan design and handle plan amendments.
• Help select qualified recordkeepers and TPAs - including overseeing the RFP process.
• Act as investment manager - selecting, monitoring, and optimizing the fund lineup.
• Research and recommend low-cost fund options and support various investment goals.
• Assume liability as a 3(21) or 3(38) fiduciary.
• Oversee quarterly investment committee meetings.
• Give advice and answer questions about compliance.
• Help employees select their 401(k) investments and provide them with 1:1 financial advice.
• Provide a trusted 3(16) fiduciary to take on plan administration and sign the IRS Form 5500.
• Assist with the annual Large Plan Audit and any Department of Labor audits.
• Integrate your plan’s recordkeeper with your payroll provider.
• Minimize errors by self-auditing payroll data before sending it to the recordkeeper.
• Handle deposits, loans, eligibility tracking, etc, to help cut down on your administrative workload.
• Provide plan information and documents with online and mobile-friendly access.
• Deliver much-needed peace of mind to owners, executives, and employees alike.

That list might seem a little more lengthy than what you’ve previously seen or experienced. Offering literally all of the above is definitely not the norm for 401(k) financial advisors. That’s a list of what can be done, not what every financial advisor will do.

But whether or not you go with an advisor who can handle everything on that checklist, there are a few absolutely essential qualifications that you shouldn’t go without...

The Critical Ways a Good 401(k) Financial Advisor Helps

Now, a big question you may be asking is, “Do I need a 401(k) financial advisor? Are they worth the money?”

It’s a great question. And really, they might be. But in order to justify the fees they’ll be charging you and your employees, a good 401(k) financial advisor should help in a few critical ways:

Fiduciary Services: 3(21) or 3(38)

A financial advisor does not automatically equal a “fiduciary”, which means your advisor might not be acting in the best interest of you plan participants. If they recommend a poor fund selection, you as the plan sponsor are still legally responsible.

Any fiduciary has the legal responsibility to act in the best interest of the 401(k) plan participants. 3(21) fiduciaries share the liability with the plan sponsor, while 3(38) fiduciaries take complete liability for building and monitoring the fund lineup (although the plan sponsor is still responsible for selecting a competent 3(38)). Talk about peace of mind!

Participant Success Services

Even if you have great funds in the plan, your worries are not over, if your employees aren’t using your plan. Low participation and deferrals rates can lead to failed nondiscrimination testing. And correcting failed testing can be costly and time consuming.

An advisor focused on participant experience ensures not only that your plan is being used to the fullest extent, but also that your employees are getting the most out of their benefits.

In addition, advisors may also offer financial wellness support, online virtual advisors, 1:1 consulting, and more - all of which help improve the overall experience of using a 401(k).

Administrative Support

Oh yes, good old 401(k) administration duties. This might not be a big focus for a lot of advisors, but it’s often a major headache for employers.

Many companies, particularly small businesses with limited time and resources, find the administrative time-sink part of 401(k) management especially daunting.

Good advisors know your pain, however, and have a variety of strategies and services to cut down on the amount of tedious admin work you have to deal with. This includes automating once time-consuming HR duties and connecting the plan sponsor to other administrative streamlining services.

Typical Costs and Fees

Just as the services an advisor might offer vary, so does their pricing.

Based on our experience, fees for 401(k) financial advisors can be as low as 0.20% of plan assets. We’ve also heard of them being as high as 1.5%, and it’s not impossible for them to be higher. These fees can be charged a few different ways: either by the plan sponsors via a direct fee, or by the participants as a percentage of plan assets.

But whoever is paying, you’ll want to keep those fees as low as possible. Even a small difference in fees can make an enormous impact on your savings down the line.

Here’s the effect of just a 1.3% higher fee:

Yeah, 1.3% more doesn’t sound like all that much, but in this example, it means almost $100,000 in lost savings!

So it’s best to avoid unnecessarily high fees (and the types of advisors who charge them) from the get-go. Which leads us to our next topic…

The 3 Types of 401(k) Financial Advisors

What services are you getting, and how much is the advisor charging? In our experience, there are really 3 different levels of advisors available on the market.

Let’s delve into those types in a bit more detail:

The Business Owner’s Personal Wealth Manager

You’ll probably find that most 401(k) financial advisors on the marketplace fit into the first category: the person who also manages the business owner’s personal wealth.

These individuals provide very basic 401(k) advising as a favor or value-added service to the business owner.

“Very Basic 401(k) Advising” normally consists of...

1. Picking the Plan’s Fund Lineup

By basically acting as brokers, wealth managers can select the funds and investment products that are available to plan participants.

They do not, however, take any fiduciary liability for their selections. It’s also not uncommon for wealth managers to favor mutual funds that provide them with kickbacks - such as the notorious 12b-1 fee (essentially a 401(k) fund sales commission and something we’re not huge fans of).

2. Occasionally Checking In

The quarterly check-in is a classic feature of a personal wealth manager acting as a 401(k) advisor. This may be in the form of a phone call or on-site visit, but it rarely happens more than a few times a year.

Oftentimes there’s a fairly close personal relationship between the business owner and their wealth manager, and much of the information and decision-making happens in this context. This might be good for trust with the business owner, but it’s pretty poor for transparency.

Traditional 401(k) Advisors

These are advisors that specialize solely in 401(k)-related services.

Oftentimes, these are larger firms with ERISA expertise that take fiduciary liability for the plan’s investments - whether as a 3(21) co-fiduciary, or as a full 3(38) fiduciary.

Traditional advisors might provide more of those helpful, participant-focused services than your average Personal Wealth Manager. That being said, they still might struggle to provide the frequent enough touches or communications that participants may need to be successful with the plan.

Tech-Enabled 401(k) Advisors

Tech-enabled advisors are new on the scene. They combine automation, cloud-based technology, and virtual advisors with dedicated teams of human advisors to offer a holistic suite of 401(k) and financial wellness services.

Tech-Enabled 401(k) Advisors offer all of the services and ERISA expertise of a Traditional 401(k) Advisor, but also handle plan administration, take legal responsibility for that administrative work, and provide frequent communications and on-demand services to ensure that participants have all the support they need to be successful with the plan.

The best part? The efficiencies of technology often allow them to offer these services for a lot less than traditional providers.

So… Is a 401(k) Financial Advisor Worth It?

Absolutely! A 401(k) financial advisor is almost certainly worth it…but (and it’s a big, important BUT), only if:

1. Your 401(k) Financial Advisor Is A Fiduciary

We’re just gonna come out and say it: if your advisor isn’t a fiduciary, they’re not worth it. If your advisor isn’t willing to take legal responsibility for acting in the best interest of plan participants, how can you be sure they’re really acting the best interest of you and your employees?

That’s like having a personal trainer telling you to lift heavy weights but refusing to help you do the workouts correctly. We’re not about that. You’ll want an advisor that protects you from financial or legal consequences that may result from your fund lineup.

2. The Services Your 401(k) Financial Advisor Provides Justify Their Cost

We don’t think we’re being revolutionary when we say there’s no room in a 401(k) plan for excessive fees or unnecessary costs. This is all about saving, after all.

That means every cost needs to be fully justified in some way. Advisors who collect a fee for nothing more than a quarterly check-in and the occasional chat are likely not pulling their weight.

Remember, a 401(k) is a seriously lengthy business. You need someone who can support your plan and employees and maximize benefits for the long haul.

Conclusion

We’ve passed along a lot of info in this guide, most of it aimed at helping you avoid getting stuck with a sub-par advisor who prevents your plan from flourishing. If there’s one truth about hiring 401(k) financial advisors, it’s that a bad one just simply isn’t worth it.

Our recommendation stands: fiduciary responsibility, administrative assistance, and commitment to employee experience are what set apart the worthwhile 401(k) advisors. After all, your company’s compliance, liability, and 401(k) administration are too important to entrust to just anyone.

Interested in working with a low-cost, tech-enabled 401(k) advisor? We’d be happy to help! Our holistic 401(k) solution combines advanced, cloud-based technology with a team of dedicated ERISA experts to make your company retirement benefit cheaper, easier to run, and quite frankly, better at setting you and your employees up for retirement. Schedule a quick, 10-minute demo today!

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