Whether approaching current clients or prospects, if they are not engaged for their retirement plan, present a service agreement that clearly outlines the adviser's duties and services to be performed.
Plan evaluation
The first mistake that an adviser can make is to come in with a solution before they understand the problem. This approach signifies that the adviser is either a product pusher or the proverbial hammer to whom the whole world looks like a nail.
While it is tempting to bash the current record keeper, adviser or investments, remember that the plan sponsor was the one who selected them and, by demeaning everything, the sponsor will feel ignorant or defensive, neither of which is desired.
Instead, start by asking what is working with the plan. Try to understand the needs and the profile of the sponsor when the record keeper or the adviser was selected and determine if there has been any significant changes like plan size, mergers or growth or change in the employee base. Find out what is working before going into what needs to be fixed. The needs of the company, owners or highly-compensated employees and the rest of the employee population are often different.
Make sure each one is understood before deciding which groups need fixing. In small companies it is usually the highly compensated or owners, in mid-size ones it's generally the employee base and in large ones it's the corporate entity.
On fees and vendors
A plan sponsors' primary fiduciary responsibilities include ensuring that fees are reasonable and designing the plan for the sole benefit of the participants.
In order to make sure that fees are reasonable, the sponsor must first understand what they are, go to market periodically as proscribed by the Department of Labor and continually monitor them. While "periodically" is not defined by the DOL, many understand it to be three to five years depending on plan size, market or significant changes to the sponsor (like a merger). Currently, it is impossible to benchmark fees without going to market. The adviser needs to conduct a market-driven request for information, if not a request for proposal periodically.
Neither the RFI of RFP needs to be overcomplicated. Almost every major 401(k) record keeper has every important feature and service - the key questions are whether they service plans like the clients; how well they perform these services; and what types of investments are offered.
Review and monitor investments
While every three to five years may be adequate for monitoring the 401(k) record keeper and plan fees, investments should be monitored much more frequently. At the outset, the type of "wrapper" or investment type needs to be determined. Investment choices generally include mutual funds or so-called '40 Act funds, annuities, and collective trusts. Collective trusts are similar to mutual funds, but not regulated by the SEC under the '40 Act, and they are not an insurance contract like annuities.
Other types of investments in 401(k) plans include separately managed accounts, exchange traded funds (or ETFs as they are more commonly known), alternative investments and individual stocks.
In the under $100 million plan market, mutual funds, annuities and collective trusts rule with the first two dominant - annuities in smaller plans and mutual funds as the plans grow.
Currently, 50% of all flow is going into asset allocation funds, of which target-date funds are the most popular.
After the type of investment is selected, which may be dictated by the record keeper selected, a system needs to be set up to monitor the investments periodically - most plans do this quarterly. Before investments can be monitored, a profile of the types of investments and their characteristics must be created, much like a recipe for baking a cake. Every quarter this recipe, or investment policy statement, should be compared to the plan's current investments, applicable benchmarks and peer groups. This report should be presented to the sponsor, who needs to sign off and acknowledge both receipt and review.
In the next article, we will review the ongoing role of a retirement adviser, which includes enrollment, advice to participants, solving problems and managing change. While all are important, setting up the plan correctly by selecting the right record keeper and investments - with an automated process to monitor them - will make the other services much easier to perform.
Barstein, president of the 401kExchange, can be reached at fbarstein@401kexchange.com.
