What Services Should Financial Advisors Provide for Retirement Plans?


In my nearly 20 years as a financial advisor (12 years solely focused on 401(k) plans), I have rarely come across business owners who know what they are paying their financial advisor for their retirement plan, let alone those who are actually getting anything out of the advisor. The typical arrangement works like this: The advisor gets an “assets under management fee” that the business owner and participants don’t directly pay for or understand in return for doing one or two meetings a year at most while rarely if ever fielding any participant calls.

This “management fee” consists of helping the business owner initially select the funds and then typically doing nothing or occasionally adding a fund or two. And it’s not even really a management fee because unless the advisor is acting as a 3(38) investment fiduciary, which they typically don’t, then they are not taking discretionary control over the selection and monitoring of plan assets. These sentiments have been echoed by, of all people, the founder of the 401(k) who strongly condemned 401(k) plan advisors’ business model, saying they are overpaid.

Here is what I believe a financial advisor should do in order to add value:

Evaluating Roth vs. Traditional 401(k)

There is often confusion about this topic.  My focus is not to push one or the other, but to help participants evaluate which one is best for them, which may change over time.  For example, those who are not responsible savers may benefit from the Roth because they would have to pay the taxes now.  Also, those whose income might remain high during retirement may benefit from a Roth because they would be paying the taxes at a potentially lower rate – and tax rates may increase.  On the other hand, the traditional 401(k) may be better for those who want to save for retirement, but would benefit and take advantage of the immediate tax deduction by spending the savings wisely.  And for others, engaging in tax diversification by splitting the contributions between the two may be best.

Budgeting

In order to determine the optimal amount to save for retirement, it’s first best to develop a budget by taking a detailed account of all of your expenses.  Some people might have significant high interest debt that they need to pay off first while others might need to first accumulate three to six months of liquid savings before contributing to the 401(k) plan.  Granted, they can always take a loan, but I always caution people about taking loans because the interest is not tax deductible and it will still be taxed upon withdrawal.  There are several budgeting apps that could be helpful, but sometimes just setting up an Excel spreadsheet detailing all expenses by category because this exercise keeps people more focused.  

Evaluating investment and inflation risk

There are several factors that determine the optimal investment selection including age, risk tolerance, income, debt, and short, intermediate, and long term spending needs.  I often focus on creating risk-based investment models ranging from conservative to moderate to aggressive so that each participant can have more customized investments than say, a target date fund which is solely based on age.  I also explain about the risk of inflation which is an increase in the supply of money that leads to rising prices.  While many are concerned about market risk (the risk of investments going down in value), it’s also important to be concerned about inflation risk and to make sure you don’t lose purchasing power.  If inflation is 8% for example, and your investments increase by 7%, then you are losing purchasing power.

Taking advantage of the tools on the website

The main tool that participants don’t often utilize is the retirement plan calculator.  Every provider offers this tool.  Since Principal is so expensive, then at least participants can try and get the most for their money.  I am willing to meet with every participant and help them use this tool properly.  The way it works is that you enter in all of your assets and their values, all of your income sources, your expected retirement age, your expected rate of return, your contribution rate, an assumed inflation rate, and your life expectancy.  Then the calculator shows you how much money you will have per month to retire on.  As you adjust this information, you will see how much more or less you will have to retire.  So this can help you figure out the effect that your contribution rate will have on your retirement.  

Debt management

Many participants think about debt separately from retirement, but they are definitely related.  If you have high interest credit card debt, for example, you will definitely want to pay that off before other debt, and once you have contributed up to the level to get the maximum match, then you will want to pay off the credit card debt before contributing any more.  The reason is that credit card debt is often 15% or more, which is more than you can expect your rate of return on your investments to be (historically the market returns 8 to 10%).  Granted, the market can return more, but that’s hard to predict.  

Evaluating outside investments and insurance

Some participants may have other investment accounts.  I can provide advice regarding these accounts too, but don’t charge any additional fee in order to do so.  While I have an insurance license, I am not looking to sell life insurance or annuities to plan participants because I want to avoid conflicts of interest.  This way, participants can feel comfortable using me as an objective resource.

Fiduciary oversight

There are significant fiduciary responsibilities that plan sponsors have.  Documenting participant calls and quarterly meetings and constructing an investment policy statement (a written description of a plan’s investment related decision-making process) that you follow are a few of ways to meet your fiduciary obligations.  Also keep in mind that as a registered advisor and 3(21) fiduciary, I assist with the selection and monitoring of plan investments, but you still maintain fiduciary responsibility for this area.  

For more information, here is the link to the Department of Labor’s summary of fiduciary responsibilities:

Plan benchmarking and provider evaluation

Benchmarking your plan every three to five years is also part of your fiduciary responsibilities.  Principal likely has a relationship with Fiduciary Benchmarks who will provide you with a free benchmarking report.  I can also help make comparisons in terms of costs and services and created a website that provides more information.