How RIAs can rule the 401(k) realm by becoming advocates for plan sponsors -- and start by eliminating eight marketplace conflicts
Brokers can still claim an edge with their knowledge of DC administrative matters but that's a bowling pin ready for the toppling
Elmer Rich III
DC plans are insti-individual. Institutional purchase and oversight of services but individual/retail investment decision making. What has always been missing is professional investment management expertise.
It is a system that was, literally, cobbled together, ad hoc from the retail mutual fund model. We were there to see this happen. That has been very profitable for the fund families but left the investors and plan sponsors on their own. Plan sponsors are neither qualified nor should legally be giving investment advice, of course.
In the DC world, Morningstar is considered “investment advice” — it’s not.
There are strong incentives for mutual fund and investment providers to not support pro, independent investment advice to the plan or investors – marketing statements not withstanding.
Independent, professional, institutional level investment advice is needed for ALL retirement plans, accounts and asset pools. All of them. We are talking about people’s life savings. Losses are likely permanent and a tragedy.
Advisors are the only group available and trained to do this work. However, likely only TPAs and plan sponsors will support this work. For the fund managers and bundled providers – the incentives point in an opposite direction.
As the author points out, you have to be a genuine geek and have a head for “boring” technical matters to work in the DC market but the services are desperately needed. Today!
One reader submitted these thoughts directly to my email:
Interesting article. I’m not sure how plan sponsors get themselves tangled up in the eight conflicts. You have to be slow witted. Having made that pronouncement, our company has used ADP as its 401k provider since day 1. ADP did our payroll and their 401k solution look more than adequate, so we went with it. When you are running/doing Finance, HR and Administration for a 70 person company, it is much easier to only deal with one provider for payroll, 401k, COBRA, FSAs etc. ADP offers over 300 mutual funds to choose from (you get to choose up to 35) and also is very strict (too strict!) in adhering to federal regulations. They provide onsite education, a decent web based interface for employees and a B+/A- handholding on setting up your plan. I do have to say that I do my own work in picking and changing the 35 choices. I down load all the performance and fee info from ADP, add in a bunch of Morningstar info, then slice and dice the 300+ funds to come with choices that could span the spectrum from cash to small market China funds.
So, if an RIA came calling on me, they would have to have something really special to offer to convince me to change. Does the RIA in your article cater to small firms with clueless owners, go after firms with 5-15M+ in 401k assets, or go for the big boys who have the capability of managing separate providers for their payroll, 401ks, FSAs etc.
Elmer Rich III
Good lord! Professionals should be picking the funds, not a company employee – part time. That is very dangerous and probably presents legal liabilities.
How can an employee of the company ever rationally justify “pricing and changing the 35 choices” on which the life savings of all employees are dependent – using Morningstar!!?? How can a responsible, professional business person ever justify doing such a thing!?
The illusion of do-it-yourself, amateur retirement plan investment administration is mistakingly fostered by the companies selling it and amateur employer investors.
This person should only be making decisions for their own investment account not every employee land their family’s life savings. There is a reason for professional roles, division or labor, delegation to professionals, etc.
The only real benefit any advisor has to offer this company and it’s plan is that the selection of investment options will not be one unqualified, employee doing it part-time. Would this person select medical treatment for his fellow employees as well, or give legal or accounting advise, perhaps plumbing.
Here is the question — why is amateur investing of 401k plans felt to be not only acceptable but preferred and a “right?”
BTW, recent research shows plan administrators just as susceptible to amateur investing mistakes, eg chasing performance, as employees with very harmful consequences.
Let me put what Elmer is saying is this pre-ERISA fiduciary context: The Prudent Man hires the Prudent Expert.
Elmer Rich III
Exactly. Because a prudent man cannot and does not have to be a prudent expert. Dave Wray, formerly of the Profit Sharing 401k Council PSCA, taught me this.
Under DOL’s proposal, will they change how advisors to 401(k) plans are paid? If so how?
Robert G Guerrero
What is the difference in a 401K and an RIA I know that the 401K the employer contribute. The RIA we buy 5,000 per year. Can you explain please. THANKS