What to Expect from Your 401(k) Advisor

At the very beginning of a plan sponsor’s relationship with a 401(k) plan advisor, the plan sponsor should have an idea of what to expect from his or her advisor. A plan may not necessarily need every service mentioned here, but plan sponsors should expect that his or her advisor can provide these services if needed.

Setting Expectations

The best results will come if the advisor sets clear and reasonable expectations at the onset of the relationship. The 401(k), or 457(b), plan's advisor can play an important role in helping plan sponsors get the most out of their retirement plans both for the plan participants and for the plan sponsors. As with all service relationships, both parties will likely get better satisfaction out of the relationship when each has a clear understanding of what services will and won’t be provided.

Advisors could be viewed as the quarterback of the retirement plan “team.” With the plan sponsor’s input, the advisor can lead the team to a successful outcome. The retirement plan team will likely include all or almost all of the following individuals:

• Employer-plan sponsor
• ERISA attorney
• Plan administrator
• Third party administrator
• Trustee-custodian
• Investment manager
• Insurance company-mutual fund partner
• Financial advisor, and
• Accountant.

Each team member has a specific role to play in the successful establishment and operation of a 401(k) plan, but the same person-entity can assume multiple roles. Some roles are fiduciary in nature and some are not. It is usually a good idea to use written service provider agreements and all service providers should comply with the ERIS sec. 408(b)(2) regulations. Successful retirement plan outcomes are more likely to be achieved through teamwork rather than one person trying to be all things to all people.

Development of a Retirement Plan Strategy

Many 401(k) plan sponsors may have a basic, but limited understanding of 401(k) plans, their responsibilities with respect to the plans, and best practices for success. Success is more likely if the advisor and plan sponsor develop an overall retirement plan strategy, keeping in mind that no two retirement plan strategies will be exactly the same. Any strategy should be customized for the specific plan sponsor.

However, there are several topics that should be considered for inclusion in the strategy. These include:

• Plan design
• Investment performance
• Increased plan participation
• Cost saving strategies
• Efficient and effective administration
• duciary education and liability protection tools
• Plan sponsor and participant education

The advisor can assist the plan sponsor in making sure he or she identifies all of these topics for consideration in developing the strategy. Most of these topics are areas where the advisor can provide insight and resources.

Plan Design Consulting

The advisor may also provide valuable guidance on plan design options for plan sponsors. The advisor should introduce plan sponsors to the many plan design options available to them and share concrete examples of how the different options impact retirement savings.

When discussing plan design, it is important to remember that many plan designs fail because the clients have not clearly defined what they expect to achieve with a retirement plan.

Designing an Investment Policy Statement

While retirement plans are not required to have an investment policy statement (“IPS”), an IPS is a valuable piece of the retirement plan portfolio and serves several important functions. All plan sponsors, whether the plan is small or large, should consider adopting one. Most importantly, the IPS provides the general investment goals and objectives of the plan sponsor and describes the strategies to meet these objectives. If the plan sponsor has not engaged an investment manager to handle the plan’s investments, the advisor and plan sponsor should work together to craft an IPS so that each has a clear understanding of the plan’s investment goals and strategies.

Because an IPS can play an important role in maintaining sound investment options for a 401(k) plan and providing a roadmap to help the plan’s investment fiduciaries comply with their fiduciary obligations, the IPS should be a topic of discussion between the advisor and the plan sponsor.

A well-drafted IPS that is consistently followed will minimize fiduciary liability for the plan sponsor in its role as “Named Fiduciary” and/or investment fiduciary of the plan by helping to establish that procedural prudence has been followed with respect to the investment options offered by the plan.

Ongoing Investment Reviews and Plan Reviews

The IPS is a roadmap for the plan’s investments that should be consulted and reviewed at least on an annual basis to ensure that the plan is still on the “right” course. The plan advisor should confirm that the plan’s fund selections still reflect the objectives set forth in the IPS. For many plan sponsors (or the plan’s investment committee delegated responsibility for plan investments), investments are likely their area of least knowledge. They will look to the advisor for knowledge and guidance in this area.

Most advisors will offer to meet with a plan sponsor each year to discuss the plan’s performance in person. In addition, the advisor should provide written fund performance reports at least quarterly. The advisor may also schedule time to discuss these reports in person or provide the plan sponsor opportunities to have a telephone conference to discuss.

The quarterly reports and annual review should discuss the investments utilized by the plan’s participants and compare them (and all plan investment options) to appropriate benchmarks. If the plan’s investment alternatives are determined by the plan’s investment fiduciary to no longer be appropriate for the plan either based on benchmarking, style drift, performance results, lack of utilization, etc., the plan advisor should provide a selection of possible alternatives that conform to the IPS requirements to replace those underperforming or underutilized funds.

As part of the annual investment review or at some other time during the year, the advisor may offer to schedule an annual plan review with the plan sponsor. Topics for discussion might include participation levels, deferral percentages, participant loans, non-discrimination testing and enrollment.

If the numbers and amounts do not reflect the plan sponsor’s expectations as previously discussed in the overall strategy, the advisor can discuss methods to improve the results. This might include automatic participant enrollment with automatic deferral escalation; changes to the matching formula to enhance participation or additional or targeted participant meetings to encourage participation.

The advisor may also provide information on the effectiveness of prior communication efforts and offer new or enhanced communication strategies that might also be effective.

Finally, the advisor should confirm that no changes are needed to the IPS. 

Excerpted from a report by Christine Cushman, JD, director, Advanced Consulting Group, Nationwide.