My thinking is rooted in challenging the status quo in the group retirement plan industry, which I do by helping businesses effectively select and monitor retirement plan service providers, ask detailed questions about their plan so they can better understand the fees and services, and make informed financial decisions that they can’t currently make due to the severe information asymmetry that exists in the industry.
More specifically, I focus on highlighting and addressing excessive and misunderstood asset-based fees charged by financial advisors, record keepers, and administrators, shining light on the conflicts of interest they face including restrictions their firms place on which service providers they can recommend, and putting forth a vision of how the industry can improve.
Some industry thought leaders who share this viewpoint include:
- Ted Benna, inventor of the 401(k), Founder and President of the 401(k) Association
- Fred Barstein, Founder & CEO of The Retirement Advisor University and consulting editor at Investment News
- Edward Siedle, former SEC attorney, pension forensics expert, and record-setting whistleblower.
- Bert Whitehead, President of Cambridge Connection Inc., Founder of the Alliance of Cambridge Advisors (now the Alliance of Comprehensive Planners), and the author of “Why Smart People Do Stupid Things with Money.”
Ted Benna’s criticism is especially incisive, as it not only diagnoses the problem but also presents a clear and simple solution:
“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.”
In the retirement plan industry, financial advisors typically charge asset-based fees and argue that they need to charge this way because they are “managing” the account. But are they actually doing any managing?
They attempt to justify their fee structure and management services by misleadingly touting the value of selecting the investment options, acting as a fiduciary, and providing vendor search and benchmarking services. In reality, technologyhas commoditized their services, resulting in advisors often being significantly overcompensated at the participants’ expense which is rarely evident to either the participants or employers.
The real value lies in advisors taking the time to meet with participants and help them figure out how to determine an optimal retirement plan contribution level, create and monitor a budget, determine an investment risk level that makes sense, effectively allocate contributions between a Roth or traditional 401(k), and implement a debt repayment plan if applicable.
With regard to fiduciary services, simply having a fiduciary on the plan doesn’t mean much. The fiduciary needs to actually add value by taking actions such as constructing an investment policy statement, documenting plan sponsor and participant phone calls and meetings, and establishing an investment committee.
Just like any other service professional, the advisory fee should be based on time and value rather than a fee based on the value of the assets which has no bearing on the value or level of services provided. Ideally, the employer should pay this fee, which has the advantages of being tax deductible, helping the employees save more for retirement, reducing fiduciary liability, and putting employers in a better position to assess the true value of the services and effectively compare to other providers.
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