Questions to Ask Potential 401(k) Advisors
According to a recent survey, 47% of plan sponsors are looking for a new plan advisor[1]. Are you one of them?
If you’re actively looking for a new advisor for your plan or even if you’re just looking as part of a regular due diligence process, here are 6 questions to ask potential 401(k) advisors.
1) Are you a 3(38) investment management fiduciary?
3(38) investment managers are fiduciaries who have discretion over the plan investments. This is distinct from a 3(21) fiduciary advisor who offers advice on plan investments but leaving the plan sponsor to ultimately bear the responsibility to select and manage investments. Hiring a 3(38) fiduciary to manage the investments can free up the plan sponsor to focus on other areas. The 3(38) fiduciary also assumes some risk that would normally be borne by the plan sponsor.
2) What are your fees and fee structure?
All retirement plans have fees. The questions are: what are they and who is paying them? An advisor should be able to clearly tell you how they are compensated and whether the fees are paid by the plan sponsor, participants, or both and in what proportion. As you conduct your due diligence, remember that ERISA requires that the fees by reasonable[2], you are not required to pick the lowest fee option. And if an advisor tells you that the advisory services are “free” with the plan, be cautious, there are no free plans, ask more questions to understand how the advisor is compensated.
By the way, do you know what fees you are paying on your current plan? Recent surveys show that 34% of plan sponsors do not know what they are currently paying[3].
3) What is the typical fund lineup offered to participants?
ERISA requires the plan sponsor or investment manager must offer diversified investment options to plan participants[4]. Since this is an ERISA requirement it is important that you ask all potential plan advisors this question. However, we have run across plans that offer 50 or more fund choices. This kind of “diversification” is overwhelming to participants and unnecessary from a fiduciary standpoint.
If you or your organization hold certain values, you may wish to know if any of the investment offered align with your values. For example, our Kingdom(k) and Kingdom(b) plans feature several investments that align with biblical values.
4) How do you select and monitor investments?
Your plan should have an Investment Policy Statement that outlines how plan decisions are made, how funds are selected and monitored, and other topics. If you hire a 3(38) investment manager, they should be able to provide an IPS that provides this important information. If you don’t have a 3(38) investment manager, then likely the plan sponsor is the one responsible for selecting and monitoring plan investments. (Do you really want this responsibility?)
5) What are the qualifications and experience of the investment manager?
If you’re hiring a 3(38) investment manager to take over management of the plan investments, you’ll want to ask about the qualifications and experience of the team managing the fund. Potential managers should be able to demonstrate their commitment to prudent processes and appropriate education and experience as demonstrated by designations such as the Chartered Financial Analyst® or Certified Investment Management Analyst®.
6) How will you help participants save for retirement?
This is really what it’s all about – helping your employees save and invest for retirement. Potential retirement plan advisors should be able to tell you how they help participants with enrollment, ongoing service and advice, easy to navigate resources, financial education, and other resources.
If you’re looking for a new retirement plan advisor to manage your plan, give us a call!
Beacon Wealth Consultants is a 3(38) investment manager specializing in faith-based investing for retirement plans. We can help you better understand your current plan and whether our plans and services might be a better choice for you and your employees.
[1] https://www.thinkadvisor.com/2022/08/23/nearly-half-of-plan-sponsors-seeking-new-advisors-in-2022-fidelity/
[2] https://uscode.house.gov/view.xhtml?path=/prelim@title29/chapter18/subchapter1/node552&edition=prelim
[3] https://www.pewtrusts.org/en/research-and-analysis/articles/2018/05/07/many-small-business-leaders-express-limited-knowledge-of-retirement-plan-fees
[4] 29 U.S. Code § 1104