Do we need financial advisor for our 401k?

[INGI]

Hi, I am a partner in a small physician group with over 50 employees. Our 401k plan contains high fee funds with 1.2% average expense ration. I am currently working with our manager to switch to another company such as Employee Fiduciary or Paychex. They offer low cost funds and lower admin fees for 401k, way better than what we have.

 

The problem is we have financial advisor with our current 401k plan. Clearly she is not doing her job based on high fund ERs but employees may meet with her to discuss investing strategy. Employee Fiduciary and Paychex's 401k  does not include financial advisor but may services available for a fee (like $15,000/yr). Neither I nor my partners see investment benefit in having financial advisor and we do not utilize her services. But my partners feel it is necessary to have financial advisor to prevent risk of lawsuit from employees.

 

My questions are - is it protective for employer to offer employees access to financial advisor as part of 401k? Are there many 401k plans who offer access to financial advisor free to employee or majority of 401k do not include financial advisor service? Is my partners' fear of lawsuits for bad investment decisions by employees due to lack of access to financial advisor have any merit? Thank you.

 

[Hatton]

A new trend is suing employers for having only high cost options in the 401k.  Lockheed Martin employees recently won a large settlement. The Wall Street Journal has had several articles on this topic recently.  Your employees may need advice but they deserve reasonable options and so do you!

[jhwkr542]

I'd think you guys have more liability in your current situation than your new potential 401k.

[jfoxcpacfp]

INGI wrote:

Hi, I am a partner in a small physician group with over 50 employees. Our 401k plan contains high fee funds with 1.2% average expense ration. I am currently working with our manager to switch to another company such as Employee Fiduciary or Paychex. They offer low cost funds and lower admin fees for 401k, way better than what we have.

The problem is we have financial advisor with our current 401k plan. Clearly she is not doing her job based on high fund ERs but employees may meet with her to discuss investing strategy. Employee Fiduciary and Paychex’s 401k  does not include financial advisor but may services available for a fee (like $15,000/yr). Neither I nor my partners see investment benefit in having financial advisor and we do not utilize her services. But my partners feel it is necessary to have financial advisor to prevent risk of lawsuit from employees.

My questions are – is it protective for employer to offer employees access to financial advisor as part of 401k? Are there many 401k plans who offer access to financial advisor free to employee or majority of 401k do not include financial advisor service? Is my partners’ fear of lawsuits for bad investment decisions by employees due to lack of access to financial advisor have any merit? Thank you.

 

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Your partners may be on to something, but not for the reason they are thinking. A 401k plan provider has an inherent conflict of interest in giving personal advice to 401k participants. While it is ok to give generic advice in a group setting, that is rarely helpful to participants and may be worth even less than you pay for it (which is "nothing").

However, a growing trend is for employers to hire an independent financial advisor to offer advice to employees. This is a free employee benefit and surveys indicate it is very popular with employees. The trick is in finding a true fiduciary for the advice (I would suggest not hiring an insurance firm to handle this, for example). Best to look for a fee-only CFP or contract with a firm that specializes in this area, such as Financial Finesse.

[ralexander]

Providing your participants someone from whom they can seek financial/investment advice is critical to their success. They don't teach these things in school, and most people just feel lost when it comes to investments, budgets, retirement planning, etc.

As Johanna stated, your advisor must provide the appropriate fiduciary responsibility for it to truly alleviate your firm from liability. You'll want a 3(38) Investment Manager to reduce your exposure as much as possible. The peace of mind alone is a worthwhile investment. Please ask your current advisor if there are a 3(38) Fiduciary.

Attaching an advisor to the plan has a bad rap because historically it's been expensive, and there are a number of company's that still charge an exorbitant amount for the service. My firm offers that service for a very affordable rate. We use Charles Schwab for our investment platform and offer participants a number of low cost index funds. Our plan also offers a self-directed brokerage window with numerous other investment options available. We advertise our 401k Recordkeeping services on the Whitecoat website. I concur that funds with average expense ratios of 1.20% present more of a liability to the trustees of the plan versus the benefit of having and advisor. We have taken over a number of plans where we provide a retirement plan with very low cost investment options and have kept the Advisory/Fiduciary Services for a total cost of about a third of what you are paying now.

I recommend searching for lower cost providers to protect yourselves. They do not have to be the cheapest, but if your plan is in excess of $2 million then your expenses can be reduced without sacrificing service or features.

 

Please give me a call or send me an email and I will prepare a no obligation cost analysis for you.

[Craigy]

Me and another guy put pressure on our firm and thankfully they ditched our previous high-expense plan for Vanguard.  Unfortunately we still have a third-party advisor which charges a fairly stiff fee, but they are much better than before.  Essentially their only purpose is to shield our firm from fiduciary liability on the plan assets, even though their guise is to provide financial advice to the employees.

For what it's worth, over the past few years Vanguard has started accepting plans with much smaller assets.  Your physician group with 50 employees may very well qualify, especially if several of those 50 employees are physicians with big balances. Vanguard is hands-down the best when it comes to providing access to low fee funds. I would pass up Paychex or EF and go straight for Vanguard or perhaps Fidelity.  Keep making a fuss and talking to your partners and make it happen.

[IMDoc]

INGI,

Our practice's 401(k) has about 70 plan participants. I've recently gotten bids from Betterment for Business, Employee Fiduciary, and Vanguard. Like you, I don't see the necessity of using an advisor but suspect that this will be a hard sell for our partners. Here are some of the things I've learned or considered through this process:

1. The employer gains some fiduciary protection from the Pension Protection Act of 2006 when they select something like Target Date Funds or balanced funds as the plans's qualified default investment alternative (QDIA). As other have alluded, it seems that the trustee's responsibility is to offer low cost, diversified investment options, not advise the employees on which options to choose. Perhaps an advisor is more helpful if a 401(k) has a bunch of actively managed funds to continually review those offerings? Hard to see how an employee could sue the trustees if their money is in a Vanguard Target Date Fund charging an ER of 0.10% (Vanguard waives the minimums on their Institutional shares within a 401(k))

2. Fee only advisors offer the best change to avoid the conflict of interests I see in our current Edward Jones guys. (I'd like to know how much money they've made from cash value life insurance they've sold our employees over the years). Employee Fiduciary's website led me to one fee only advisor in our area. He offered to serve our plan for just over $200/hour. We could hire him for a half day once a quarter to be available in our office and give a lunchtime talk for a few grand a year. I don't mind hiring an advisor to teach our employees about the need to save and to increase our participation rate, but that advice better be reasonably-priced and non-conflicted.

3. My personal belief is that our practice should foot the advisor's fees, not the employees. They employees didn't ask for an advisor and most of them likely won't use one, considering that they avoid the scoundrels we currently have. However, the fee only advisor with whom I have spoken says that his duties change if the practice is paying him. If the employees are paying for his services, then he can give them advice about their particular situation. If the practice is hiring him, he will only give general advise and education to each employee about the fund and answer questions they have.

4. Family members who have worked at several of the largest hospitals in our state say that if their 401(k)/403(b) used an advisor, they didn't know about it. They just made their investment choices on their own. My wife's experience at Quest Diagnostics in the past was similar; she chose a TDF from Fidelity w/o the aid of an advisor. For better or worse, the move from defined-benefit to defined-contribution plans means employers aren't controlling employees' retirement money like they did in the pension plan days. Surely employees have an obligation at some level to educate themselves.

Message me if you have questions about my experience so far. Sounds like we're in a similar place.

[AlexDDS]

Employee Fiduciary owns Frugal Financial and they provide fiduciary services, ERISA 3.38 for 0.1% or 1,000 minimum fee.

http://www.frugalfinancial.com/pricing/

[litovskyassetmanagement]

INGI wrote:

Hi, I am a partner in a small physician group with over 50 employees. Our 401k plan contains high fee funds with 1.2% average expense ration. I am currently working with our manager to switch to another company such as Employee Fiduciary or Paychex. They offer low cost funds and lower admin fees for 401k, way better than what we have.

 

The problem is we have financial advisor with our current 401k plan. Clearly she is not doing her job based on high fund ERs but employees may meet with her to discuss investing strategy. Employee Fiduciary and Paychex’s 401k  does not include financial advisor but may services available for a fee (like $15,000/yr). Neither I nor my partners see investment benefit in having financial advisor and we do not utilize her services. But my partners feel it is necessary to have financial advisor to prevent risk of lawsuit from employees.

 

My questions are – is it protective for employer to offer employees access to financial advisor as part of 401k? Are there many 401k plans who offer access to financial advisor free to employee or majority of 401k do not include financial advisor service? Is my partners’ fear of lawsuits for bad investment decisions by employees due to lack of access to financial advisor have any merit? Thank you.

 

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The following two articles will answer many of your group's questions:

https://www.whitecoatinvestor.com/how-to-run-a-successful-retirement-plan-for-a-medical-or-dental-practice/

http://www.dentaltown.com/Dentaltown/Blogs.aspx?action=VIEWPOST&b=143&bp=3376

Administrative issues are often the trigger of an IRS audit, incidentally, and you can have a plan without an adviser, but there is much value in having an adviser because otherwise the practice owners are fully responsible for what happens to the employees, investment selection, participant education etc.  All of this can be outsourced cost-effectively.  Your plan should also have a standalone top notch TPA who will make sure that your plan stays compliant.  Platforms such as EF or Paychex are nothing more than record-keepers, and are not particularly important.  There are plenty of record-keepers that can be used that are low cost, but without a TPA and a good adviser your plan will not be getting the services necessary to keep it in compliance as well as to keep the costs low.

An adviser has to be a fiduciary (ERISA 3(38) ideally), and be compensated with a fixed/flat fee (and not revenue sharing or other asset-based fees).  Sitting down with each participant is fine, but this advice can only be offered with respect to their retirement plan assets, not their personal assets.  This service can be provided cost-effectively by hiring providers that specialize in offering one on one advice, and this, too can be done cost-effectively without overpaying.  I always oversee this type of service, and I see this as a good thing to have available for your plan.  In most cases it is not necessary to ask for advice - for one thing, most employees will not ask for advice, and by configuring a number of model portfolios and also by defaulting those who do not make an election into a portfolio will do the trick.

 

 

 

[litovskyassetmanagement]

AlexDDS wrote:

Employee Fiduciary owns Frugal Financial and they provide fiduciary services, ERISA 3.38 for 0.1% or 1,000 minimum fee.

http://www.frugalfinancial.com/pricing/

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Kind of defeats the idea of 'independent fiduciary' - your adviser should work exclusively for you, and for nobody else, otherwise that's a conflict of interest from the start.  There is so much more that is necessary for small practice plans, and these types of services are quite useless because you will never actually see or talk to an adviser, and you will never actually get any real advice related to your plan. There are plenty of ERISA 3(38) fiduciaries, but not all are created equal. You always get what you pay for.

[litovskyassetmanagement]

Craigy wrote:

Me and another guy put pressure on our firm and thankfully they ditched our previous high-expense plan for Vanguard.  Unfortunately we still have a third-party advisor which charges a fairly stiff fee, but they are much better than before.  Essentially their only purpose is to shield our firm from fiduciary liability on the plan assets, even though their guise is to provide financial advice to the employees.

For what it’s worth, over the past few years Vanguard has started accepting plans with much smaller assets.  Your physician group with 50 employees may very well qualify, especially if several of those 50 employees are physicians with big balances. Vanguard is hands-down the best when it comes to providing access to low fee funds. I would pass up Paychex or EF and go straight for Vanguard or perhaps Fidelity.  Keep making a fuss and talking to your partners and make it happen.

Click to expand...

Actually, Vanguard does not provide any ERISA 3(38) fiduciary services, so you are still on the hook for investment selection and participant education, as well as administrative oversight.  Vanguard uses Ascensus which is subpar at best as a TPA (they are just ok as a record-keeper). I have several plans with them, and I prefer to use other record-keepers, and a standalone TPA who is accessible (vs. having to deal with multiple layers of not very knowledgeable employees).  So many small practice plans have brokerage windows and administrative compliance issues related to these and many other parts of the plan that in some cases we have to make the plan go through voluntary compliance before we even take it over.  Low cost Vanguard and DFA funds can be obtained from any record-keeper.

[litovskyassetmanagement]

IMDoc wrote:

INGI,

Our practice’s 401(k) has about 70 plan participants. I’ve recently gotten bids from Betterment for Business, Employee Fiduciary, and Vanguard. Like you, I don’t see the necessity of using an advisor but suspect that this will be a hard sell for our partners. Here are some of the things I’ve learned or considered through this process:

1. The employer gains some fiduciary protection from the Pension Protection Act of 2006 when they select something like Target Date Funds or balanced funds as the plans’s qualified default investment alternative (QDIA). As other have alluded, it seems that the trustee’s responsibility is to offer low cost, diversified investment options, not advise the employees on which options to choose. Perhaps an advisor is more helpful if a 401(k) has a bunch of actively managed funds to continually review those offerings? Hard to see how an employee could sue the trustees if their money is in a Vanguard Target Date Fund charging an ER of 0.10% (Vanguard waives the minimums on their Institutional shares within a 401(k))

2. Fee only advisors offer the best change to avoid the conflict of interests I see in our current Edward Jones guys. (I’d like to know how much money they’ve made from cash value life insurance they’ve sold our employees over the years). Employee Fiduciary’s website led me to one fee only advisor in our area. He offered to serve our plan for just over $200/hour. We could hire him for a half day once a quarter to be available in our office and give a lunchtime talk for a few grand a year. I don’t mind hiring an advisor to teach our employees about the need to save and to increase our participation rate, but that advice better be reasonably-priced and non-conflicted.

3. My personal belief is that our practice should foot the advisor’s fees, not the employees. They employees didn’t ask for an advisor and most of them likely won’t use one, considering that they avoid the scoundrels we currently have. However, the fee only advisor with whom I have spoken says that his duties change if the practice is paying him. If the employees are paying for his services, then he can give them advice about their particular situation. If the practice is hiring him, he will only give general advise and education to each employee about the fund and answer questions they have.

4. Family members who have worked at several of the largest hospitals in our state say that if their 401(k)/403(b) used an advisor, they didn’t know about it. They just made their investment choices on their own. My wife’s experience at Quest Diagnostics in the past was similar; she chose a TDF from Fidelity w/o the aid of an advisor. For better or worse, the move from defined-benefit to defined-contribution plans means employers aren’t controlling employees’ retirement money like they did in the pension plan days. Surely employees have an obligation at some level to educate themselves.

Message me if you have questions about my experience so far. Sounds like we’re in a similar place.

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Fee only also means asset-based fees, which are a terrible deal for any retirement plan.  The fee should be FLAT, and not asset-based.  There is no justification for an asset-based fee.  There is also participant education component.  Employer is supposed to provide enough information for the employee to make an informed choice.  By the way, TDF has its own issues.  For younger employees a TDF invests most of the money in stocks, and that might not be appropriate vs. having a risk-managed portfolio (target risk vs. target date).  This is something that the plan sponsor is on the hook for, but these types of decisions are better outsourced to an ERISA 3(38) fiduciary.

You can not have an adviser be hourly and be an ERISA 3(38) fiduciary.  They can provide personalized investment advice to plan participants for that fee, but not any plan level advice to the plan sponsor/committee.

The problem is that none of the ERISA 3(38) fiduciaries are providing truly comprehensive advice to the plan for a fixed/flat fee, and many companies that are in the business of providing such advice make it into 'robo' advice where it is limited to only the selection of investments.  Your plan should have an investment policy statement and a knowledgeable adviser who can also provide advice on such things as brokerage windows, ERISA issues, potential for adding a Cash Balance plan, etc.