Finding the Right Investment Adviser for 401(k) Participants

By Joanne Sammer Aug 28, 2008
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Ever since the Pension Protection Act of 2006 (PPA) provided guidance for employers wanting to give 401(k) plan participants access to investment advice, the number of employers contracting with third-party investment advisers to provide those services has been increasing.

For instance, SHRM's 2008 Employee Benefits survey report found that 40 percent of SHRM members provide individual investment advice as an employee benefit, up from 20 percent in 2004. Many organizations now also offer retirement planning services (38 percent) and general courses on financial planning (23 percent). Meanwhile, the 2008 401(k) Benchmarking Survey by Deloitte Consulting and the International Foundation of Employee Benefit Plans pegged the proportion of employers providing access to employee- or employer-paid individualized financial counseling or investment advice services even higher, at 51 percent.


While the growing prevalence of investment advice is mostly good news for retirement plan participants, it creates challenges for employers. After all, as the market for investment advice grows and more players enter that market, it becomes that much harder for retirement plan sponsors to fulfill their fiduciary responsibility and choose the right adviser on behalf of plan participants.

Not every investment adviser has the necessary experience with 401(k) plans in general, with plans of a particular size, or even with providing high-quality services, however. Some even turn out to be perpetrators of investment scams (see box, below).

Guard Employees Against Early Retirement Scams

The Financial Industry Regulatory Authority (FINRA), a self-regulatory group, has two online resources to help evaluate financial advisers offering retirement planning workshops. Help Your Employees Achieve Their Retirement Dream: Tips for Spotting Early Retirement Scams offers tips for employers on how to evaluate the financial professionals involved in early retirement seminars and seminar materials such as invitations, slides, handouts and scripts. Early Retirement Seminars 101: Smart Tips for Spotting Retirement Scams is intended to alert employees to the pitfalls of early retirement schemes that may target them.

"After helping employees lay the groundwork for financial independence in retirement through company-sponsored plans, companies don't want to unwittingly help scamsters lure their employees into an early, and financially perilous, retirement," said FINRA CEO Mary L. Schapiro, a member of the President's Advisory Council on Financial Literacy. "While many third-party seminars offer solid information, others—especially those that promote early retirement—may include misleading, even fraudulent promises of big financial returns and the dream of a comfortable, but ultimately unsustainable, retirement lifestyle."

Employers should, in particular, ensure that managers do not allow—without proper vetting and approval from HR—company offices or meeting rooms to be used by financial advisers seeking to sign up employees as investment clients. Monitoring the posting of solicitations at the worksite should also be a high priority.

Making the Choice

To separate the wheat from the chaff and choose an investment adviser that meets participants needs, consider the following steps.

  1. Identify needs. “Plan sponsors need to define what they are looking for in an investment adviser,” says Lisa Shidler, an editor of financial services industry trade magazine InvestmentNews who specializes in 401(k) and other retirement plans. Once they do that, the challenge is to find the investment adviser that best fits those needs. Those criteria will be heavily influenced by the employee population. For example, blue collar workers may be inexperienced when it comes to investing and may require more interaction with an investment adviser.
  2. Make sure they are independent. It is critical to know all the ways an investment adviser earns compensation. Although the plan sponsor or plan participants may pay a flat fee or a fee based on a percentage of plan assets, advisers sometimes have other compensation arrangements with financial services companies. In these cases, the adviser has a financial incentive to push a certain companies' products regardless of their appropriateness for plan participants. “You want someone who will provide unbiased advice with no commissions or other financial incentives involved,” says Michael Ziccardi, vice president with CBIZ Financial Solutions in Cleveland. Therefore, "it is essential that the adviser disclose all sources of income."
  3. Examine credentials. Another important step is to examine all of the adviser’s accreditations to determine whether his or her credentials remain current and are relevant to participant needs. “The key question is, do they have the background necessary to build a suitable and high-quality portfolio of investments for plan participants?” says Zaccardi.
    Information on investment advisers' accreditation can be found on FINRA's web page Understanding Professional Designations. Plan sponsors also can check on enforcement actions against an investment adviser by using the U.S. Securities and Exchange Commissions' (SEC) online Investment Adviser search tool.
  4. Consider experience. Plan size and other factors will also affect the choice of investment adviser. “Given the volatility in the markets, it is a good idea to focus on advisers who are experts in the 401(k) space,” says Shidler. “You don’t want to pick a dabbler.”
    Small plans, in particular, often find it difficult to get enough attention from investment advisers, so it makes sense for sponsors of these plans to work with an adviser who specializes in smaller plans or who has an operating model that is conducive to supporting smaller plans.
    Keep in mind that while many advisers focus on promoting the total amount of assets under their management, that does not guarantee that the adviser has worked with similarly sized retirement plans. This raises questions such as: If the adviser usually works with large plans, will it pay enough attention to a smaller plan consistently over the long term? Or if the adviser usually works with smaller plans, will it have the resources to meet the needs to a larger plan?
  5. Ensure participant access. If plan participants want at least some individual time with an investment adviser, it is important to determine how much individualized attention an adviser is prepared to provide, and how often.
    It is also important to determine through which channels this interaction will take place (over the telephone, face-to-face, online or other options), whether individual participants can initiate this contact, how often participants can expect to interact with the advisor, and how long each session will last.
  6. Measure performance. Once a plan sponsor has chosen an investment adviser to work with plan participants, ongoing performance measurement and evaluation is essential. The metrics used should focus on investment performance as well as how well advisers are meeting plan participants’ needs and expectations, including whether participants are getting access to an adviser in a timely way, and whether the adviser is responsive enough and thoroughly addresses participants’ questions and concerns.
  7. Document the process. Choosing an investment adviser invokes a plan sponsor’s fiduciary responsibility to plan participants. Therefore, it is a good idea to document the process used to select the investment adviser and measure ongoing performance.
    “The PPA requires an annual audit of any investment adviser arrangement conducted by independent outside experts,” says Mike Murphy, director of compensation and benefits for Shoe Carnival Inc. in Evansville, Ind., and a member of SHRM's Total Rewards/Compensation & Benefits special expertise panel.
    If plan fiduciaries do not feel confident enough to choose an investment adviser on their own, Murphy suggests they bring in an independent expert to evaluate the available choices. “This is much better than waiting to evaluate that choice a year later during the annual audit,” he says.

Additional Resources

A U.S. Department of Labor Field Assistance Bulletin provides additional guidance on evaluating investment advisers. Also, the SEC has answers to frequently asked questions posted in its web page Investment Advisers: What You Need to Know Before Choosing One.

Related Articles:

Most 401(k) Investment Advice Is General, SHRM Poll Finds, SHRM Online Benefits Discipline, September 2010

DOL Issues New Proposed Rule on Investment Advice, SHRM Online Benefits Discipline, February 2010

Joanne Sammer is a New Jersey-based business and financial writer. Her articles have appeared in a number of publications, including HR Magazine, Business Finance, Consulting, Compliance Week and Treasury & Risk Management.

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