With the help of the Food Network and Hollywood movies, top chefs have become stars in their own right, known for their uncompromisingly high standards.
Their passion for doing the job at an elite level makes reservations at their restaurants highly sought after among discerning diners. But if I go to a five-star restaurant and pay good money to eat supposedly world-class food, I expect a chef’s preparation.
The same holds true in a top-rated 401(k) plan. Is the plan sponsor paying “chef” fees to a broker who’s merely a cook? A great fiduciary advisor is like a passionate chef, and there to help sponsors and participants experience something great.
Because I am passionate about my profession as a fiduciary advisor to 401(k) plans inside and outside Oklahoma, I’ve provided three ways to tell if the 401(k) plan is prepared by a “cook”—or a “fake” 401(k) advisor—instead of a chef.
With so many life and health insurance agents and stockbrokers masquerading as “chefs,” most employers, unfortunately, have never known the difference.
Warning Sign No. 1: Offloading
The 401(k) broker is offloading the selection and monitoring of the funds to some well-known RIA like Morningstar, Wilshire, Mesirow or Iron Financial. Do they sound familiar? Most inexperienced brokers that sell 401(k) plans will transfer the selection and monitoring of the plan’s 401(k) funds (which is a fiduciary act) to these types of fiduciary vendors offering 3(16) or 3(38) services.
But doing so potentially puts their broker/dealer in a precarious position, from a liability standpoint, if the plan is ever sued.
Writing in a Morningstar column, W. Scott Simon, a world-class advisor himself and ERISA expert, said he believes plan sponsors who use these services may find out they’re not be all they are made out to be.
“In the retirement plan marketplace, the inmates are running the asylum whenever non-fiduciaries control the activities of fiduciaries, such as in the 3(38) outsourcing milieu,” Simon wrote.
Broker/dealers, insurance agencies and mutual fund companies don’t like risk or liability. So, the typical solution is to instruct their brokers to offload this important duty of selecting and monitoring of the funds to another fiduciary.
The problem is, the broker’s fat fee is still on top of the sponsor and participants’ retirement money? And what’s the fee then for, to hand out enrollment kits? If a broker is offloading the fiduciary selection of funds to someone else, the sponsor is getting burned by a fake 401(k) advisor.
Warning Sign No. 2: TDF selection
The plan sponsor has no idea how the plan’s target-date funds (TDFs) were selected. This one is easy. The Department of Labor came out with guidance to employers after the market meltdown of 2008-2009 specifying that they had to know how and why TDFs were selected.
If a plan sponsor doesn’t know how their plan’s TDFs were selected, this is an indication a cook is serving their plan. Almost 70% of all money in 401(k) plans in America today is being deposited into TDFs.
Vanguard, Fidelity, T. Rowe Price, American Funds, to name a few quality 401(k) vendors (along with many other fund families that provide 401(k) plan recordkeeping services) are competing to get plan participant money in their target-date funds.
Do you think a recordkeeper is happy when a plan sponsor wants TDFs from a competitor in a 401(k) plan they administer? These recordkeepers will typically allow other TDFs in their plans, but there may be higher administrative and recordkeeping costs as a result.
The lesson is that many employers are unaware that their 401(k) vendor may have a hidden agenda in offering proprietary TDFs.
401(k) advisors need to have notes and/or supporting data on fund comparisons.
One question for an advisor is, “Are the target date funds managed ‘to’ or ‘through’? And most importantly, is there anything in our Investment Policy Statement explaining how and why the TDFs were selected?”
If they have a “deer in the headlights” look when questioned, the plan sponsor should look for a new advisor. They have a fry cook and not a chef.
Warning Sign No. 3: IPS development
How was the plan’s Investment Policy Statement (IPS) developed and what were the criteria used to select the investments? Think of a fiduciary advisor as a chef selecting the dishes that make it on a restaurant menu.
Good restaurant owners want to know what their chef’s standards are for selecting the ingredients for each dish. Is he or she using frozen food or fresh ingredients? Is the chef buying prime or choice beef? A well-constructed IPS provides plan sponsors with a recipe for how their “chef” is cooking in the kitchen (funds selected for the 401(k).
A professionally trained fiduciary advisor then uses this IPS to monitor the funds in the plan. We’ve used the Fi360 tool since 2006. Fi360 fiduciary scoring has 11 criteria helping us select and monitor the funds. Many amateur 401(k) brokers don’t develop one for plan sponsors and are using the IPS offered by the 401(k) vendor. It’s really a canned, off-the-shelf Investment Policy Statement that a fry cook can get from any 401(k) vendor.
If a plan sponsor has no idea how their IPS was put together, it’s time to get rid of the “cook” and hire a chef.
Disclaimer: The opinions expressed above are that of the author and do not necessarily represent those of 401(k) Specialist.
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