How employers can evaluate a 401(k) investment adviser

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Each year employers should spend some time evaluating the providers they work with their 401(k) plan.

Assessing the performance of your 401(k) investment adviser is often the most difficult since he/she may be the captain of your 401(k) provider team. But the good news is there are some ways for plan sponsors to tell if the adviser is doing a good job.

Here are things that top advisers do.

Sign on to your plan as a fiduciary. Employers should not continue to work with an adviser who will not sign on to the plan as a fiduciary. In addition, employers should understand how their adviser’s fiduciary responsibilities are affected by the new regulations that took effect on June 9. You can feel better about working with an investment adviser who is employed by a Registered Investment Advisery (RIA) firm. These advisers are required to sign on to your 401(k) plan as fiduciaries without limitation. You will need to perform additional due diligence if your adviser works for a brokerage firm, bank or insurance company, given the exceptions that exist in the new regulations.

Provide a complete menu of services. Production of reports, investment option performance evaluation, fund searches, Investment Policy Statement (IPS) maintenance and fiduciary compliance consulting are all core investment advisory services. In addition, your adviser should be a key player in coordinating your employee education sessions; managing your recordkeeper, trustee, custodian and other providers; benchmarking your plan; helping with plan design issues; and implementing your financial wellness education solution.

Have a clean background. Studies have shown that investment advisers who have been sued in the past are more likely to be sued in the future. You don’t have to work with problem advisers. Check the background of your investment adviser using BrokerCheck. BrokerCheck is a free service provided by the Financial Industry Regulatory Authority (FINRA), a financial industry regulatory agency under the direction of the Securities and Exchange Commission (SEC). Any violation you find on the BrokerCheck website for your existing adviser should cause you to begin searching for another.

Provide leading-edge advice. Top 401(k) investment advisers are focused on sharing advice with their clients that keeps their 401(k) plans market competitive. This includes suggestions on plan design (the addition of auto features, loan program updates and Roth 401(k) options), employee education (integration of 401(k) plan education sessions with financial wellness education) and investment menu maintenance (an index option for each asset class).

Manage investment costs. It’s becoming common to offer an index option for each asset class. Employers also should be using nearly all institutional or R6 mutual fund share classes in their 401(k) plan. Mutual fund costs continue to decline, and plan sponsors should make changes to their investment menu annually to take advantage of lower-cost share classes as they become available.

Practice objectivity. Don’t work with an investment adviser who is also an asset manager or recordkeeper. For example, many employers use mutual fund companies as their investment adviser as well as their asset manager and/or recordkeeper. No surprise, these investment advisers tend to overuse the investment funds their mutual fund family offers. This is a conflict of interest that compromises the investment adviser’s objectivity and may also be a breach of your fiduciary duty.

Work for investment advisory firms. This may seem logical, but there are a lot of plan sponsors that hire accounting firms, banks or insurance companies to provide investment advisory services to their 401(k) plans. Hire a professional who works for a firm whose core business is providing investment advice. There is a major difference in the quality of advice you will receive.

Practice fee transparency. Some advisers receive soft dollar payments from mutual fund families. As a result, it’s hard to determine exactly what you are paying them. Work with those advisers who practice fee transparency. These advisers will produce an invoice for plan sponsors each quarter for the services they provide. Their only source of revenue is the fees they receive from their clients.

Recommend the best investment options. Many employers use investment advisers who are required to recommend proprietary products or who aren't able to work with the entire universe of investment options or providers. Investment advisers who work for brokerage firms, banks and insurance companies fall into these categories. Work with an adviser who has no conflicts of interest and will make the best recommendations for your plan and participants.

Finally, the SEC has put together a great list of questions that you may wish to consider asking your investment adviser.

Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, a RIA firm helping 401(k) plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.

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