Most Americans don't get any professional financial advice about retirement. And boy, do they need it. Many small employers desperately want help initiating a 401(k) plan and wading through the myriad investment options they know nothing about. Employees have little idea how much to save or how to pick the right fund. Enter the financial advisor to save the day.
Or not. The American 401(k) system was never really constructed to provide the best retirement savings platform for individuals.
What started out as an executive tax shield evolved over time to provide retirement security for millions of American workers through changes in the marketplace and regulation. Average fees have fallen, services have been streamlined, and policy changes have improved savings and investing outcomes for participants. But it is obviously not perfect—it's too expensive, leads to wide variation in outcomes, lacks effective decumulation strategies, and it has a big issue with financial advice. In many cases, the employers and employees who need hands-on help the most are least able to get it.
Fiduciary Issues
The system works reasonably well for big employers. They can put together committees of ERISA attorneys and financial experts to select the right provider, record keeper, independent investment advisors and managed account providers. Disaggregation of defined contribution services is the name of the game, and each component is becoming more and more efficient. As competition among the big players gets tougher and outcomes continue to improve for employees of large companies, it is hard to argue that the DC system needs much additional regulatory tinkering. And the quality of advice, while not perfect, continues to improve.
As many in the industry know too well, advisors who hope to avoid straying over the fiduciary line must limit the scope of their advice to both plan sponsors and participants. Pete Swisher, senior vice president at Pentegra Retirement Services, prefers to refer to non-fiduciary advisors as "consultants" to better differentiate them from advisors who are ERISA fiduciaries. He also recognizes that many advisors and their clients don't necessarily see the difference. A non-fiduciary advisor is "virtually indistinguishable in a client's mind from a fiduciary advisor, with the key difference being the words that are used; the non-fiduciary is not supposed to recommend anything, and the advisor is."
But not recommending anything is obviously tough for an advisor who is helping out a business owner who just needs some help creating a plan. Entrepreneurs may not know much about investments or 401(k) rules—and it isn't necessarily a topic they want to know. So they hire someone who promises to help. Very often that someone is not a fiduciary advisor.
Of course, hiring a non-fiduciary doesn't mean they've shifted legal responsibility for managing the plan. In fact, it keeps them on the fiduciary hook as a plan sponsor. In many cases, the advisor is performing an important service to small businesses and their employees. They are often very knowledgeable and want to do the right thing. Some would even like to be perceived as a fiduciary, but the plan provider who pays them wants to avoid what they see as an increasingly frightening ERISA lawsuit quagmire.
Saddling small businesses with a fiduciary burden doesn't strike me as an efficient system. It's pretty obvious that many don't have the knowledge to effectively monitor the plan provider. I asked University of Michigan professor and ERISA law expert Dana Muir about the wisdom of placing the fiduciary burden on employers. "Many small business owners lack the expertise and interest to select investment options for a 401(k) or other pension plan," said Muir. "It makes no sense to burden them with fiduciary liability. Instead, the financial experts that recommend investments for those plans should have the fiduciary obligation to ensure the advice they give is in the best interests of plan participants."
Except the industry isn't exactly clamoring to grab the hot fiduciary potato from the hands of small business owners. The ongoing battle with the Department of Labor over whether the non-fiduciary advisor will continue to exist in the future is starting to heat up. A recent study by Greenwald Associates informed small business owners that "The Department of Labor is considering prohibiting both retirement plan providers and the advisors who sell retirement plans to employers from assisting the employers in the selection and monitoring of the funds in the retirement plan." Not surprisingly this didn't sound like a great idea to a lot of small business owners.
To its credit, the survey also reminded employers that they do have a fiduciary duty to their employees when selecting investment options within a 401(k). Then the survey also reminds employers that many of them rely on their investment advisor to help select and monitor these fund choices. So, a small business has a fiduciary responsibility to their employees to select the right investments, they don't know much about investments, and they rely on a helpful investment advisor to choose the right ones. Except the helpful advisor can recommend investments that will get the business owner sued.
