How to tell if a 401(k) plan investment adviser measures up

Each year retirement plan sponsors should take time to evaluate their providers. Included in this group is your 401(k) plan investment adviser. Most plan sponsors use an investment adviser to help them with their 401(k) plans. This is a smart decision since many advisers are able to save plan sponsors at least as much as they charge. How can you tell if you are working with the right 401(k) plan investment adviser? Top advisers will have the following characteristics:

1. Sign-on to your plan as a fiduciary. Regardless of what the final Department of Labor regulations say about adviser fiduciary responsibility, you should not hire or continue to work with an adviser who will not sign on to your plan as a fiduciary. In addition, you should expect to receive the services outlined here.

2. Have a clean background. Studies have shown that investment advisers who have been sued in the past are likely to be sued again in the future. You shouldn’t work with problem advisers. Check the background of your investment adviser, or an adviser you are thinking of hiring, using BrokerCheck. BrokerCheck is a free service provided by the Financial Industry Regulatory Authority (FINRA), a financial industry regulatory agency under the direction of the Securities and Exchange Commission. A violation you find on the BrokerCheck website for your existing adviser should cause you to begin searching for another. Similarly, any violation should cause you to drop an adviser from the list of advisers you are thinking of hiring.

4. Do not accept soft-dollar payments. Soft-dollar payments are received by some advisers from mutual fund families. Consider only those advisers who practice fee transparency. These advisers will produce a bill for you each quarter for the services they provide. Their only source of revenue is the fees they receive from their clients.

5. Are objective. Don’t hire an investment adviser that is also an asset manager or recordkeeper. For example, many employers use mutual fund companies as their investment adviser as well as asset manager and/or recordkeeper. No surprise, these investment advisers tend to overuse the investment funds their mutual fund family offers. These types of advisers have a conflict of interest which compromises their objectivity. As a result, following their recommendations may be a breach of your fiduciary duty.

6. Work for investment advisory firms. This may seem logical; however, there are a lot of plan sponsors that hire accounting firms or banks to provide 401(k) investment advisory services to their retirement plans. Hire a professional who works for a firm whose core business is providing investment advice. There is a major difference in the quality of advice you will receive.

7. Work for RIAs. I admit that I am biased since I am a registered investment advisor. RIAs are different from brokers. An RIA is required to put a client’s best interests first and act as a fiduciary with regard to any recommendations shared. Brokers work for their brokerage firms, not their clients. The DOL’s final fiduciary regulations may provide loopholes for brokers to avoid fiduciary obligations. Simplify the issue so you don’t have to worry about loopholes. Hire an RIA.

8. Are able to work with everyone. Many employers use investment advisers who are required to recommend proprietary products or who aren’t able to work with the entire universe of investment options (there are more than 30,000 investment options!). Investment advisors who work for brokerage firms or mutual fund companies fall into these categories. They are conflicted. Hire an advisor who has no conflicts of interest and will make the best recommendations for your plan and participants.

Finally, the SEC has put together a nice list of questions that you may wish to consider asking a prospective or existing investment adviser.