At our year-end review meeting with our client, Janet, we started discussing the 401(k) plan that she administers at her employer. 

Janet was concerned that several aspects of the plan were being incorrectly managed and that the current adviser was doing nothing to help the situation.  While recordkeeping and administrative functions are not necessarily the responsibility of your 401(k) adviser, it is important to hire a financial professional that is knowledgeable about the regulatory environment and compliance aspects surrounding qualified plans and that can be hard to do. 

According to a 2011 study conducted by The Retirement Advisor University, there are hundreds of thousands of financial advisers in this country that provide advice to retirement plan sponsors, but only 5,000 financial advisers maintain 10 or more retirement plan clients and 2,500 financial advisers maintain 25 or more. This leads us to believe that less than 1% of financial advisers in this country truly focus on the defined contribution market!  

Even if your adviser is one of the few that maintains several qualified plans, we would argue that you need to start asking the tough questions to verify their knowledge.  Here are a few things to consider:

1.   Does your adviser have the “expert” factor? It is important to hire an adviser who lives and breathes 401(k) plans, not someone whose business revolves only around investing money. Typically the “expert” retirement plan advisers understand the intricacies of plan design, investment due diligence, fees, prudent processes, retirement readiness among participants, and compliance matters.

2.   Does your adviser even know whether he or she is acting in a fiduciary capacity? In our experience, advisers will tell you they are serving as a fiduciary, but their role may be limited in nature. You need to know the difference between an Employee Retirement Income Security Act (ERISA) 3(21) and 3(38) fiduciary and you’ll likely want your adviser to sign on the dotted line as a co-fiduciary.

3.   Does your adviser understand your plan’s design? Has your plan ever failed your ADP/ACP test or been Top Heavy?  Are you correctly following the plan’s definition of compensation?  Would changing the pool of eligible employees impact the success of the plan? Do you feel confident your adviser could offer solutions for how to remedy these issues and more or that he or she even knows what they mean?

4.   Is your adviser’s compensation built into the investment expenses of your plan or is it structured in a way that aligns your interest with theirs? When the only constant in this industry is change, an independent perspective is the surest way to get your bearings. You shouldn’t be concerned whether your adviser is pressured to recommend a specific vendor or product, you need to know that their fee structure is fully transparent and autonomous of the specific recommendations made to you.

5.   Has your adviser implemented a sound process for selecting and monitoring your plan’s qualified default investment alternative (QDIA)?  Although most plan sponsors consider 2008 QDIA regulations to be “old news,” the world of QDIA options has changed drastically even over the past few years. To determine whether your adviser is up-to-speed, we feel that he or she should have talked with you regarding underlying QDIA investment changes, shifting glidepath models, the use of alternative asset classes, new fee arrangements, and reviewed whether your QDIA meets your participants’ specific needs.

6.   Has your adviser talked with you about participant retirement “readiness?” Many participants feel overwhelmed by deciding how much to save, by having to make their own investment decisions, and by not knowing how to monitor their progress. If you tell a participant they will need $1.5 million to retire, their eyes instantly glaze over.  We have found that participants really need an adviser who can simplify things and get down on their level. The good news is that many advisers who focus on managing defined contribution plans understand the unique issues participants face and are often better equipped with an effective communication strategy.

7.   Does your adviser’s benchmarking process include requests for proposals (RFPs) and a pitchy sales presentation, or did he or she use effective and independent methods for benchmarking your plan? We often find that advisers who haven’t wrapped their hands around the retirement industry rely heavily on product vendors and sales representatives when benchmarking and presenting to clients. In contrast, a thorough benchmarking process typically entails collecting quotes, spreadsheeting the data, and comparing core components such as total plan costs, technology services, employee communications, compliance, investment management, recordkeeping and provider compatibility. Only once it is determined there is a need to look further at other vendors or products, should outside sales representatives be introduced into the process.

After reviewing these questions with her plan adviser, Janet was left to carefully consider whether or not the current adviser was the right fit for the job.  As a fiduciary to her plan, she knows that it is her utmost responsibility to provide a plan that is the most appropriate for her participants and that having the right adviser in place is paramount to their success.

Trent A. Grinkmeyer, AIF, CRPC; Valerie R. Leonard, AIF; and Jamie Kertis, QKA, AIF  

Trent Grinkmeyer, Valerie Leonard, and Jamie Kertis are Registered Representatives and Investment Adviser Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through Grinkmeyer Leonard Financial or CES Insurance Agency. Grinkmeyer Leonard Financial, 1950 Stonegate Drive, Suite 275, Birmingham, AL 35242. (205) 970-9088.