With a significant loosening of the fiduciary definition and need for greater accountability in the 401(k) market looming large, one industry insider recommends that retirement plan advisers be willing to demonstrate their worth every three to five years.
Retirement expert Fred Barstein says advisers have resisted this suggestion, preferring not be benchmarked by their clients as part of a request for proposal process. But it certainly squares with the federal push for deeper oversight, and while there may not be a burning need for a formal RFP involving smaller plans under $25 million, he says it’s a must for larger plans.
“When it comes to recordkeeping and money management, you have to do it,” insists Barstein, founder and executive director of the Retirement Adviser University (TRAU) program, which is offered in collaboration with the UCLA Anderson School of Management Executive Education. “It’s your fiduciary responsibility to make sure the fees are reasonable,” and that “the plan is designed in the sole interest of the participants. It can’t be that the [sponsor] company is getting free payroll because they use this record keeper, or that they’re getting better credit rates from their bank.”
Rampant inexperience
Barstein estimates that as many as 60% of retirement plans are still using inexperienced advisers, down from about 90% before the recession. But he expects the impending Department of Labor fiduciary rule governing conflicts of interest will “accelerate the move away from blind squirrels to experienced advisers,” especially in the medium-to-large market.
To help them differentiate themselves in this environment, TRAU offers advisers a designation so they can demonstrate that they have legitimate professional training.
“Of the 300,000 advisers out there that are actively selling investments to the public, 250,000 are getting paid through a referral fee on a client contribution plan."
“Of the 300,000 advisers out there that are actively selling investments to the public, 250,000 are getting paid through a referral fee on a client contribution plan,” according to Barstein. “It’s astounding. Only 25,000 are really qualified, or even minimally qualified, with at least five plans and $25 million under management.”
RFPs, he notes, help answer many questions. To wit: How long the adviser has been in business? How many ERISA attorneys are on staff? How many plans and what amount of assets are under management? What tools and services does the adviser provide to help benchmark fees and analyze funds?
“What happens is that most plan sponsors hire advisers because of relationships,” Barstein says. “They know them; they’re working with them; they’re assured by them. They don’t really go through a very formal process. When you go through a formal process, [such as] an RFP, you can’t hide.”
