401K Provider Search

401(k) plan sponsors lack the resources to know what service provider(s) to select, and therefore often choose unnecessarily expensive asset-based providers on their own or rely on brokers or financial advisors who offer unnecessary services and are riddled with conflicts of interest that incentivize them to recommend these same kinds of providers.  401(k) Provider Search aims to level the playing field by providing plan sponsors with vital information to help make informed decisions about selecting service providers.


How the Industry Needs to Change

 

The advisors are getting paid each time they go through the process with an employer to help pick funds as if they’re doing an original piece of work. There are more than half a million 401(k) plans, so that’s happened over half a million times. The fund menus aren’t that much different. But advisors are getting paid as if they’re doing an original piece of work. That’s just bizarre, extremely inefficient, and much too expensive.

First of all, they need to get away from asset-driven compensation and be paid a fee for service, the same as accountants or attorneys, who don’t get paid a percentage of corporate [client] assets. Their role should shift to helping people focus on how to succeed at retiring successfully, not on investment return. Building a smarter investment mix is pretty much of a commodity now. The focus should be on goals: “I want to retire successful. Help me do that.”

Instead of teaching clients small-cap, large-cap, value vs. growth and that stuff, help participants find ways to save more to do a better job of financial management and focus on the stream of income they’ll [need] for their retirement.”

Ted Benna, inventor of the 401(k), Founder and President of the 401(k) Association


Because financial advisors so often drive the conversation about the company’s retirement plan, they exercise significant influence over which parties get involved, how each party gets paid, and the nature of the services provided.  By learning more about how the industry operates, plan sponsors can better hold advisors accountable. 


Uncovering Deception

Plan sponsors are more knowledgeable than participants but, given that over 92% of defined contribution plans have less than $5 million in assets and have no full-time employee with investment expertise responsible solely for the plan, an overwhelming majority of sponsors rely upon providers for turnkey solutions to plan needs. These providers largely control the flow of information to sponsors and (with the consent of the sponsor) are responsible for communications to participants. Not surprising, providers of services to plans have taken advantage of their “informational advantage” and the inability of sponsors and participants to commit time to scrutinizing economic arrangements between providers and plans.

Providers have prospered even as participants have suffered mediocre results. Sponsors, freed of liability related to these plans, have little incentive to intervene.

As a result of lack of transparency regarding questionable industry practices, the market for defined contribution retirement plan service providers, including record-keepers and investment managers, remains uncompetitive despite a large number of vendors and plan sponsors. Excessive fees and poor performance are commonplace. Yet providers maintain the industry is not to blame for these unfortunate results. Industry solutions to problematic performance (such as target date funds and personalized financial advice) inevitably involve heaping even greater costs onto investors, further reducing the likelihood of satisfactory net performance. Dissatisfaction with defined contribution plans has grown as evidence of wrongdoing has mounted (and the markets have faltered) and is at an all-time high.”

Edward Siedle, former SEC attorney, former Legal Counsel and Director of Compliance to Putnam Investments

 

In a free and competitive market, buyers and sellers should have equal access to information. Financial advisors can only help by providing honest, objective advice for a flat fee, help plan sponsors find high quality and affordable service providers, and structure a retirement plan that best serves both employers and participants rather than the providers.