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Part 5: An understanding the advice is individualized and based on the needs of the retirement investor

Maybe it is easier to explain when advice might not be individualized to the retirement investor.  What if the vendor puts out a proposed fund line-up (NO)?  What if the broker dealer puts together a preferred list of funds or stocks (NO)?  Now what if the advisor took that preferred broker dealer list and narrowed it down to picks for that individual plan sponsor (Probably)?

Why would the average plan sponsor allow for advice that wasn’t regular, with a contract, for compensation, a primary basis, and individualized?  The main reason we see is plan sponsor confusion.  The delivery and sales process for retirement plan advisors can be confusing.  Everyone says they are a fiduciary, everyone promotes similar services, and everyone appears to be an expert.  What is the average plan sponsor to do?

Ask a lot of questions.  How much of the advisors business comes from qualified retirement plans?  Can you see a sample client contract?  Can you speak to some of their retirement plan clients?  And most importantly, are they dually registered?  If they have a broker/dealer affiliation, it is very difficult to tell what side of their business you are working with.  If you are working with a firm that is registered solely with the Securities Exchange Commission (or state for smaller firms), at least you will know that you are working with a fiduciary.  Then the question becomes, are they any good?

Part 4: The recommendation should be a primary basis for investment decisions

This one seems like a no brainer.  Who hires an investment advisor only to not follow their recommendations?  We have seen this happen where a plan sponsor is just looking for validation of their prior thoughts on the marketplace.  Since the retirement plan advisor is providing advice on much more than just investments (think plan design, vendor compatibility, product structure, etc.), they are typically meeting this requirement of the five part test and exceeding it in other areas.

We can’t think of too many scenarios where an advisors recommendations don’t serve as the primary basis for decisions but in the case of outsourced ERISA 3(21) or ERISA 3(38) investment managers that are not the advisor, this could still be the case.  The advisor could say they have simply provided a list of options and it was the plan sponsor who made the decisions.  If it wasn’t even the advisor who formulated the options (think Morningstar, Mesirow, etc.), then the advisor could avoid becoming a fiduciary.

Part 3: A mutual understanding, arrangement or agreement, between the investor and the advisor

We are shocked when we meet with plan sponsors and in our review of their advisor we find that they have no written agreement with regard to what the fee is and what services they will be providing.  Most professional services industries have some sort of basic contract that outlines the project and what will be provided for the cost of the contract.

Under the old and now new five part test, we are back to the wild west of what constitutes and agreement.  We would advise every plan sponsor to have a contract with their advisor or his/her firm.  If they do not have one for your plan, we would recommend finding a new advisor.  How can a plan sponsor satisfy the prudent man rule without a basic contract that outlines the price & services?  How do you evaluate whether your arrangement is reasonable without any explicit idea regarding the services rendered?

Even though it stands to reason that you would have a contract for a service that probably costs thousands of dollars, it is shocking to find out how few 401K plan sponsors miss this simple step.  They are inundated during a plan conversion with TPA contracts, recordkeeper contracts, and investment contracts for stable value investments that they forget the one contract that really matters most and that is the one from the person they think is their fiduciary.

Part 2: Provide the advice on a regular basis

Many commission based sales people are simply completing a transaction.  This is an area where many investors are rightfully confused.  If your advisor is dually eligible to both receive commissions and provide investment advice, which are they doing for you?  If they are simply selling a product/platform and relying on the vendor to do all of the reviews and heavy lifting, then it is possible they are just serving in an arms length capacity.

For 401K, 403B & 457B plans, most retirement plan advisors are serving in a fiduciary capacity.  There are some still in the small end of the marketplace that do not but it is difficult to justify your services if you are not providing independent advice.  If your advisor is providing quarterly reports, assisting with the construction and amending of your investment policy statement, and continually providing guidance and advice to your trustees, then they are likely serving in a fiduciary capacity.

If they are showing up with the plan vendor and sitting on their hands while the vendor provides the evaluation and review piece, then you probably need to start looking for a new advisor.  This is part 2 of the five part test and just about every retirement plan advisor worth a nickel is checking this second part of the test.

Part 1: Make investment or insurance recommendations for compensation

This should be the easy one.  Does the person you rely on for your investment advice receive compensation?  Unless you are talking to your Father who isn’t charging you anything, then you are likely paying something.  Whether that something is agreed to in a contract, is invoiced directly to you, or is paid by the product you purchased, then part one of the five part test is met.

Just about every advisor providing advice for a fee would meet part one of the five part test.  Unfortunately there are a number of “advisors” who aren’t really investment advisors at all.  When in doubt, take a look at Investment Advisor Public Disclosure site to read up on your advisor.  How long have they been in the field?  Who have they worked for?  Have they had any complaints against them?  This will be useful information that anyone with an internet connection can access.

What is the 5-part test & why should Plan Sponsors care?

So after over a half decade and numerous iterations, the “Fiduciary Rule” has been thrown out by the 5th Circuit Court of Appeals.  What does that mean for Plan Sponsors who are trying to run a business and therefore turn to an expert to help them manage their retirement plan responsibilities?  In technical terms, the old five part test that determines whether an advisor serves as  a fiduciary for non-discretionary investment advice (think 401K, 403b, 457b) is the law of the land again.

In the lead up to the fiduciary rule recordkeepers and broker/dealer firms were going through numerous contortions to continue their business models.  Look no further than Fidelity’s “point in time” fiduciary.  They have subsequently backed away from this due to the rule being vacated.  If you look at the broker/dealer world where soft dollar compensation is the rule that govern’s the land for product placement, firms who took bold positions like Merrill Lynch, UBS, Wells Fargo and others are now reconsidering those options now that they don’t have to provide unconflicted advice to investors.

In a series of posts, we will look at the old five part test and what makes a fiduciary or not.  If your firm is working with a Mesirow, Guidedchoice, Morningstar or other check the box fiduciary service, there is a decent probability that the advisor you use is providing little more than education.  Unfortunately, that education is probably wildly overpriced relative to the market and what you could receive from a firm that is not dually registered and always serves in a fiduciary capacity.

Controlling the uncontrollable, Part VII

#6 Market Returns

You can watch CNBC all day long and actually be less informed about the current state of the market than at the beginning of the day.  For every bull market opinion there is likely a cautionary tale.  For every successful stock pick a colleague tells you about at the water cooler there are likely a half a dozen more that weren’t mentioned of varying success.

Market returns are the #1 cause of phone calls we receive.  Is the market high or low?  Should I do my RMD now or later in the year when stock market returns may be higher (they also could be lower)?  Is current trade policy going to sink the market?  Are higher interest rates going to eat into my fixed income returns and if so for how long?

The day to day and month to month iterations of the market can be unnerving.  It is why 401K investors have historically not done as well as pension investors.  The emotional toll taken frequently forces action at the wrong time.  Sticking to an asset allocation that you can live with (item #2), is the one sure fire way you can mitigate & navigate the highs and lows of the market.  It doesn’t mean you won’t lose money, I can guarantee you will at some point(s).  It does mean that you are accepting the inevitable which is the market is going to go up & down.

It is going to do that at times that are terribly inconvenient for you as a retire as well.  Focusing on the items you can control and then setting an allocation that has volatility you can live with (and market return expectations you need to fund your retirement) is the key to 401k success.  #401k, #403b, #457b

Controlling the uncontrollable: Part VI

#5 Tax Policy

We frequently have discussions with employers about pending legislation and how that can affect their workplace retirement plan.  While we can discuss and debate these items all day, you have no control over them.  We get questions all the time about how pending legislative proposals can effect your retirement.

The most recent discussions that occur every year around this time deal with social security.  Will it be funded at current levels, will it lower the inflation adjustments, will payroll taxes go up, will the cap on social security income be removed, etc?  While all of these are important factors in your retirement, you have no control over them.

What is important is to go back to items #1 & #2 and make sure that those items that are in your control can put you in a good position regardless of what happens with tax policy.  #401k #403b #457b

Controlling the uncontrollable: Part V

#4 Longevity

How long you live and are able to earn is another item that obviously you don’t have 100% control over.  Diet, exercise, medical care and good genes all have a say.  To increase the likelihood of your earnings power and longevity in the work force, it is imperative to practice good health habits as well as good financial habits.

Now while typing this I am simultaneously laughing a bit.  I have meant to start my stretching and abdominal workout for the better part of ten years.  It still hasn’t happened.  Finding those habits that allow you to be successful little by little are the key however.  Working on portion control, making sure you take advantage of your annual check-up (and following the Doctors recommendations), walking a bit more, limit or eliminate bad behavior, all can add to your longevity in the workplace.  #401k, #403b, #457b

Controlling the uncontrollable: Part IV

#3 Earnings

We are now moving into the items that you don’t have 100% control over but do have a say in.  Your earnings power is tied to a number of things.  Your education level, career field, and region frequently have a say in your earnings power.  We find many potential retirement savers in 401K & 403B plans talk about the reasons why they can’t save.  One of those might be that this is your first job and you just don’t earn that much.

While this maybe true, keep in mind that as you reach into your peak earnings years (frequently your late 40’s to mid-50’s), those also align with your peak spending years.  Forming good savings habits early will help to increase those contributions as you reach peak earnings.  If you have the ability to go for advanced certifications or training in your field, those are concrete ways you can improve your earnings potential now.

Don’t forget, once those student loans are paid off, now you might have a home purchase, start of a family, saving for dependents college, emergency spending accounts, and a whole host of items that will keep pulling on your pocketbook.  #401k, #403b #457b