Your employees want 401k help that you and your broker can’t give.
As fiduciary advisors, we talk to hundreds of 401k participants each year both individually and in group education meetings at their workplace. What we have found is that 401k participants tend to fall into one of three categories when it comes to knowing how to choose and manage the investments in their 401k accounts.
First, there are the true do-it-yourselfers; they have a process and execute it according to plan. They are often students of the market on some level and have outside assets they self manage as well.
The second category lands on the other end of the spectrum. They are the participants that do not have the time, inclination and/or knowledge to self manage their 401k portfolios.
The third category falls somewhere in the middle. They are willing to pay attention, but don’t feel they always have enough knowledge to make informed choices.
The problem facing the majority of participants, who fall into the later two categories, is the lack of available help and guidance. As a result, many participants become complacent or inactive while others just start guessing. This really is not their fault. They have been conditioned by the systems in place to feel as if they are on their own when it comes to the investing part.
Asking for help
Let’s look at what happens traditionally when employees want 401k help. If they go to their employer or human resources department, they quickly learn they can only get generic information about the plan and that there is no investment related help, let alone actual investment advice the employer can give. The employer and/or the HR staff are not investment advisors; therefore they do not have the expertise to provide answers to the investment related questions that are being asked. Moreover, advice they give could make the employer liable for the performance (or lack thereof) in the employees’ portfolios.
As a result, participants are instructed by HR to contact the broker on the plan. Since the broker sold the plan including the investments in it, he/she should be able to help. Isn’t that what the broker is being paid for?
Alas, the reality is a majority of brokers are not acting in a fiduciary capacity and are actually precluded from giving specific investment advice to a participant. Instead of actually getting questions answered, a participant is given general investment information. This may include being directed to colorful charts and graphs and perhaps a risk tolerance quiz that the participants complete on their own. The participants are then expected to come to their own conclusions. As a result, often the participants are no closer to understanding what to do than when they first walked in to HR. They may actually be more confused. This is where the guessing and inaction come in.
Why doesn’t the broker actually give advice?
You might wonder why the broker cannot help. On the surface it seems a bit backwards. After all – the brokers are the investment people.
One underlying reason has to do with the way the broker may be compensated. Each choice in the 401k investment lineup has it’s own cost of ownership, commonly called the expense ratio. The broker’s compensation is often based on a percentage of those charges. Since all of the investment choices do not charge the same amount, the broker has a potential conflict of interest. The Department of Labor and the ERISA laws that govern 401k and many 403b plans say it would be possible for a broker to steer participants into the investments in the plan that pay them more than the others so they are precluded from giving specific advice to participants.
A solvable problem
The solutions fall into two categories: One, work with a fiduciary advisor who offers participant advice rather than a sales broker. A fiduciary advisor is compensated with a flat fee, which is not tied to the expense ratio of the investments in the plan, thus eliminating the conflict of interest issue. Or two, add an advisory service on to your existing plan with a third party fiduciary advisor.
As a plan sponsor, it is worth looking at both scenarios as they both have pros and cons. With a little information you can make an informed decision that will benefit your employees and be good for your plan while reducing your fiduciary liability.
To learn more about working with a fiduciary advisor on your 401k or 403b plan, contact us by clicking here.