• Mark Nicholas

The 401(k) Information Gap

In my experience, plan fiduciaries often assert “facts” about plan services that simply aren’t representative of the investment services they receive. The financial services industry has a reputation for obfuscating the finer details of services. This has led to robust reporting and disclosure requirements that, ironically, make it harder for fiduciaries to understand the intricacies of services they are outsourcing. This disparity between perceived and actual services is a huge challenge for plan sponsors.


Below are some important considerations to keep in mind when assessing providers:


  • Many financial professionals are limited in what they can offer plan sponsors. This is more than just a “fiduciary or non-fiduciary” discussion. Many fiduciary advisers are also limited to working with certain recordkeeping platforms, which can substantially increase plan costs and lower plan returns.


  • Often, a financial professional’s back office will require them to utilize either their proprietary 3(38) solution or similar solutions offered by select third parties such as Morningstar, Mesirow, and Wilshire. When elected by a plan sponsor, your financial adviser isn’t controlling the investments and you will almost always pay a substantial asset-based markup for the service.


  • Fiduciaries tend to believe that their financial professional is providing “investment advice” to plan participants. It is exceptionally rare, in my experience, for this to be true; instead of providing advice (with the attendant fiduciary responsibilities) they provide “guidance”, generally directing participants to a target date fund. While guidance and advice may sound similar, guidance is not a fiduciary service and doesn’t include personalized recommendations. Managed account services through third parties are gaining steam, but often subject to markups like those for 3(38) services noted above and limited in scope.


  • Determining the prudence of investments requires more than simply minimizing costs and benchmarking individual funds to an appropriate peer group/index. While these are important, risk mitigation and consideration for an investment’s role in portfolio composition for diversification are critical and often overlooked components in assessing an investment and/or an investment manager.


Many limitations are covered in service contracts or required disclosures, but some aren’t. Even where disclosed, it takes specialized expertise to really understand the documents and recognize what services that aren’t offered. Without truly understanding the scope of services, it’s not possible to determine if the compensation for those services is reasonable, which can be a huge problem. As Mark Twain quipped, “It ain’t what you don’t know that will get you in trouble. It’s what you know for sure that just ain’t so.”


Transform Retirement can help you figure out what services you’re being provided and how much you’re paying for them, even if you have no intention of changing providers. Call or email us for details on how we can help you know for sure what you’re getting from your providers.


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