The Benefits of a Retirement Plan Investment Advisor
By Christine Danko
Universal Advisor, 2006 Issue No. 3

In the complicated, ever-changing world of retirement plans, it’s difficult to stay on top of every detail of your plan. This is especially true given the heightened sensitivity to a plan sponsor’s fiduciary responsibilities; after all, the president just signed the most sweeping reform of America’s pension laws in the last 30 years, and the current savings rate among Americans is negative. It’s a lot for plan sponsors to be concerned with. How is your plan handling these retirement realities? To whom can you turn to act in your best interest and guide you though the maze of plan options and features? The answer may be found in the services of a retirement plan investment advisor.

Assistance With Fiduciary Responsibilities

According to well-known ERISA (Employee Retirement Income Security Act) attorney, Fred Reisch, plan fiduciaries have some of the highest standards of care known to man. An advisor can help you fulfill your very important role as a plan fiduciary. Typical consulting services may include drafting an investment policy statement; assisting in the selection of mutual fund options by following a well-documented, prudent process; monitoring ongoing investment performance; and assisting with service provider selection. This list is not all-inclusive, as retirement plan investment consultants vary considerably in their business models and in the consulting services they offer. Many advisors act in a fiduciary capacity and are willing to accept that role in writing; however, not all advisors are the same, so it’s important to inquire about those services and to understand any service agreements.

ERISA requires that the fiduciaries of employee benefit plans administer and manage their plans prudently and in the best interest of the plan’s participants and beneficiaries. Considering that the plan fiduciaries may have personal liability associated with this requirement, it’s easy to see how the services of an independent consultant could be of value. Careful consideration must be given to the prudent process an advisor uses in selecting and monitoring the investments in the plan. Is their process documented? Is risk-adjusted performance being evaluated appropriately? Does the investment policy statement provide clear direction on when to eliminate an investment from the plan? Is it being followed?

Under the Investment Advisors Act of 1940, an investment advisor providing consulting services has a fiduciary duty to provide disinterested advice and disclose any material conflicts of interest to their clients. Are advisors being paid directly from the investments in the plan? Do you know what those fees are? Is there an incentive for the plan or the advisor to select a certain investment or mutual fund that’s affiliated with the advisor or the recordkeeper? An advisor that’s independent can act in the best interest of the plan and its participants at all times.

Full Fee Disclosure

One of the many requirements of plan fiduciaries is to control plan costs. This requires that plan fiduciaries know all the fees that are being charged to the plan and participants, which is crucial considering that almost 90 percent of the fees paid by retirement plans are investment fees that are often hidden. It also requires that they determine whether these fees are reasonable given the services being offered. In addition, retirement plan investment advisors should disclose their compensation schedule and, if paid directly from the investments in the plan, how much they’re receiving on an annual basis. Payments made directly to retirement advisors from mutual funds or money managers could create material conflicts of interest, and they may cause the plan to pay more than it should in consulting fees. To eliminate conflicts of interest and to ensure that your retirement plan consultant is working for you and in the best interest of the plan, it’s recommended that your retirement plan investment advisor be paid independent of the investments offered in the plan. An advisor that has knowledge of the retirement plan industry can also assist to benchmark total plan costs, investments, and service providers.

Participant Education

The money your staff will need for retirement generally comes from three areas: Social Security, personal savings, and a company’s retirement plan. According to the 16th annual Retirement Confidence Survey, published by the Employee Benefit Research Institute in April 2006, many American workers aren’t ready to undertake the task of financial planning for their own retirement and face the prospect of having to work far longer than they expect. More than half of workers saving for retirement report total savings and investments (not including the value of their primary residence or any defined benefit plans) of less than $50,000 (52 percent). However, the large majority of workers who haven’t put money aside for retirement have little in savings at all: 75 percent of these workers say their assets total less than $10,000. The need for staff to save for their retirement is more important than ever.

According to the U.S. Department of Commerce, Bureau of Economic Analysis, the personal savings rate in the United States through June 30, 2006 is a negative 1.5 percent. The Social Security system will likely experience changes and/or reductions in benefits in the future, which will put an even greater burden on companies’ retirement plans to compensate for that shortfall.

Retirement plan investment advisors can play a critical role in educating and motivating staff to save for retirement. This support can be in the form of consulting on education campaigns or offering creative industry techniques and tools to make it easy for participants to make decisions. Examples include employing automatic plan features that are gaining in popularity like automatic enrollment, automatic salary deferral increases, and automatically investing contributions for participants. Other solutions include designing model portfolios or lifestyle funds to offer participants a simple investment solution or leveraging the tools and resources of recordkeepers to use multi-media approaches to touch participants.

In Conclusion

The world of retirement plans continues to evolve, making it increasingly difficult to monitor your plan effectively. Given the heightened sensitivity to a plan sponsor’s fiduciary responsibilities, it’s never been more important to partner with a retirement plan investment advisor.