Advising on 401(k) Plans:
Over the eighteen years I’ve been servicing my clients’ financial needs, I’ve looked at the investment choices of literally hundreds of 401(k) plans on their behalf.
I’ve found the investment choices often surprisingly bad, the expenses high and the service by the assigned advisor essentially zero. There’s a system of smoke and mirrors in the 401(k) world where the advisor is supposed to provide expertise on the investment options used by the plan. However, if the plan uses actively managed mutual funds then it’s up to the plan to monitor the funds, discuss them, and potentially replace them if they’re not performing as expected.
Sometimes actively managed mutual funds can beat their relevant index over time but overwhelmingly they don’t. The few good funds may go through rough patches only to recover later. So what if the investment committee, in doing their job as fiduciary for the plan, replaces a fund that’s under-performing with a fund that’s about to under-perform? Or what if relatively orphaned plans never even really have their investment options considered periodically, either because the plan isn’t a big source of revenue for the advisor or the plan sponsor has their own business to consider as a top priority?
And is any of this necessary?
A plan can be put in place where the investment choices are either generic index funds or index funds and proprietarily constructed index funds (with a real chance of out-performing their comparable index). Under this format it’s then extremely unlikely the performance ever needs to be considered beyond ensuring the funds are acting as they should as passive investment vehicles. The advisor then potentially doesn’t have anything to do, and shouldn’t get paid much.
However, their role could become one of true service both to the sponsor and the participants; as we believe it should be. This entire structure should cost a lot less, the investment returns should be more reliable and the service should then be excellent and ongoing.
A trend for service to participants is help-yourself tools and educational materials but in my experience many people not only have limited understanding of how investing works but also feel a deep mistrust and are fearful of loss. Understandable, given the overwhelming amount of information available, coupled with most people’s natural aversion to loss.
Big firms also have a tendency, in their generic materials, to not offer real advice, but advice that’s unlikely to get them sued; no real work is done and no liability, at least in the current regulatory environment.
There are literally life changing moments to be had when plan participants reach out to an actual expert on investing and financial planning, which is what we offer in the 401(k) plans we service.
Excellent service, fair pricing and true expertise and perspective are available. This kind of thinking is counter, and possibly not even understood, by the broader transactionally based financial services industry, but real time attention and caring makes a real difference.