5 Things Plan Sponsors Should Know Before Hiring an Advisor

About a year ago, I was asked by an advisor if we had ever written anything about the potential pitfalls of hiring a relative as a plan advisor.

We hadn’t, as it turns out, in no small part because some things just seem (painfully) obvious to me – but it resulted in a column that, as I tried to point out at the time, was applicable to more than just familial relations.

In recent weeks I have received similar requests: one from an advisor looking for something on the hazards of “tying” bank business to providing services to a retirement plan, and another looking for validation of the wisdom of using a qualified 401(k) advisor on a plan rather than a part-timer.

Now, as someone who has been involved with ERISA and its fiduciary strictures his entire professional life, the responses to these questions are nearly self-evident. But let’s face it: Many, perhaps most, plan fiduciaries haven’t had that much exposure.

Before making a decision to hire an advisor – or for that matter, any decision involving the plan – here are some key considerations that plan fiduciaries should bear in mind.

If you’re a plan sponsor, you’re an ERISA fiduciary.

If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. Ditto if you are able to hire individuals to control or invest those assets.

If you’re an ERISA fiduciary, you have specific legal responsibilities.

There are several specific duties under the law, but the primary one is that the fiduciary must run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.

Note the words “solely” and “exclusive purpose.” Now consider a plan fiduciary who decides to hire a service provider based on services they provide outside the plan. Would that be a decision solely in the interests of participants? For the exclusive purpose of providing benefits?

ERISA fiduciaries must avoid conflicts of interest.

ERISA fiduciaries must also avoid conflicts of interest – meaning, according to the Labor Department, “they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.”

That means that a plan sponsor must not cause the plan/participants to pay for services if it results in free and/or discounted services for the employer/plan sponsor. Oh, and that’s even if the price the plan/participants pay is deemed reasonable.

As an ERISA fiduciary, you’re expected to be an expert — or to hire help that is.

It’s one thing to find yourself in a job for which you are not immediately trained, or perhaps even qualified, but there’s no beginner track for ERISA fiduciaries. You’re not only directed to act for the exclusive purpose of providing benefits, but to do so at the level of an expert. The DOL has said that “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert.”

There’s nothing that says that a relative can’t meet that standard, nor should providing other, unrelated services to the organization preclude a firm from consideration for offering services to the plan. And, of course, there is nothing that says a part-time advisor couldn’t provide a full-time level of service and attention.

On the other hand, as an ERISA fiduciary you need to be sure that they do, in fact, meet that standard.

As an ERISA fiduciary, your liability is personal.

ERISA holds plan fiduciaries to a high legal standard. Indeed, at least one federal court has described it as “the highest known to the law.”

There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that you, as an ERISA fiduciary, can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

It is, of course, possible that a brother-in-law, a banking relationship, or an individual who is only committed on a part-time basis is, in fact, an expert in such matters, that they bring real value to your plan and the participants and beneficiaries it serves, and that the decision to engage those services is based solely on your desire to fulfill your fiduciary obligations – for the exclusive benefit of the plan, its participants and beneficiaries.

Just make sure that you have made that determination independent of other factors, and that, perhaps particularly if those other factors are present, that your process and analysis is documented.

Your advisor-to-be will understand.

- Nevin E. Adams, JD

5 Ways to Boost Retirement Confidence

With increasing regularity, the financial services industry pumps out surveys that purport to capture America’s sense of confidence regarding its readiness for retirement, at least on a financial footing. Mostly, however, they seem to focus on the symptom, rather than dealing with the underlying cause(s).

However well-intentioned, these all seem designed to highlight a persistent strong undercurrent of concern — one that, certainly when juxtaposed against the generally disappointing preparation levels reported by respondents, seems completely warranted.

Confidence about retirement is one thing, of course, and preparation something else, though the two are logically intertwined. That said, for those looking to shore up confidence levels, data from the granddaddy of such surveys — the non-partisan Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey — provides a roadmap:

Work for an employer that offers a retirement plan.

Data indicates that workers — even workers of modest means — are 15 times more likely to save for retirement if they have access to a retirement plan at work than those who don’t have that option. It is perhaps not surprising then that in recent years, the RCS has tracked a huge gap in confidence about retirement between those who have a retirement plan and those who don’t; in the 2015 RCS, 44% of workers without a retirement plan are not at all confident about having enough money for a comfortable retirement, compared with only 14% of those who have a plan.

Furthermore, among those with a plan, the percentage of those who are very confident increased from 14% in 2013 to 28% in 2015. In contrast, the percentage of those who are very confident remained statistically unchanged among those without a plan (10% in 2013, 9% in 2014 and 12% in 2015).
Workers reporting that they or their spouses have money in a defined contribution plan or IRA or have a defined benefit plan from a current or previous employer were more than twice as likely as those without any of these plans to be very confident (24% with a plan vs. 9% without a plan in the 2014 RCS).

Figure out how much you’ll need.

The RCS has found that workers reporting that they or their spouses have a DC, DB or IRA plan are twice as likely as those who do not have such a plan (60% vs. 23%) to have tried to do a calculation to estimate what they will need to finance their retirement.

And despite higher savings goals, workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (33% vs. 12% who have not done a calculation). Moreover, worker households with a retirement plan are more likely than those without such plans to report having saved for retirement (90% vs. 20%).

That said, as recently as the 2015 RCS, fewer than half (48%) of workers report they and/or their spouses have tried to calculate — even a single time — how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

In other words, while many have (or had) a retirement plan, they don’t seem to have a plan for retirement.

Talk with an advisor.

Anecdotally, when you ask someone about their interest in engaging the services of an advisor, they are likely to tell you that they will wait until they need one — by which most seem to mean that, once they have accumulated enough savings to make it “worthwhile,” they’ll consider getting some help. What’s often overlooked is the role that a financial advisor — particularly one whose expense is covered by an employer plan — can play in helping make that account growth a reality.

In the 2015 RCS, more than three-quarters (78%) of respondents who had talked with a professional financial advisor about retirement planning were either somewhat or very confident that they will have enough money to live comfortably throughout their retirement years, far more than the 49% who did not use an advisor. The 2013 RCS found that nearly two-thirds (65%) of those who used either online calculators or asked the advice of financial advisors were either somewhat confident or very confident that they will have enough money to live comfortably through their retirement years.

On the other hand, nearly half (44.6%) of those who simply guessed were also somewhat confident or very confident.

It seems that, as noted above, the calculation/determination itself has a positive impact, though the kind predicated on real assessment clearly does more for confidence (and probably for the actual basis of that confidence as well).

Retire.

One might expect that the financial realities of being in retirement might well shatter the fragile levels of confidence expressed ahead of crossing that threshold — and yet the RCS has consistently chronicled that retirement confidence is higher among those already in retirement than among those still working. In the 2015 RCS, 37% of retirees were very confident about having enough money to live comfortably throughout their retirement years (up from 28% in 2014 and 18% in 2013), and a third were somewhat confident.

This is despite a consistent finding that individuals are frequently forced to leave the workforce earlier than planned, and that they are less likely to work in retirement than pre-retirees anticipated (in the 2015 RCS, 67% of current workers plan to work for pay in retirement, compared with just 23% of retirees who report they have actually worked for pay in retirement. In the 2015 RCS, 37% of retirees were very confident about their prospects, up from 27% in 2014 and 18% as recently as 2013.

However, as one might expect, workers who are not confident about their financial security in retirement plan to retire later, on average, than those who express confidence.

Save for retirement.

Retirement confidence, like confidence generally, is a state of mind, and one not always grounded in an accurate assessment of reality. As noted above, the mere act of guessing about retirement needs seems to be enough to provide a boost in confidence, certainly in the short run.

Regardless, it’s hard to deny that the best, most secure, means of assuring retirement confidence is establishing a solid foundation for that belief by:

• taking advantage of the opportunity to save and having the discipline to do so;
• establishing a goal and revisiting that goal on a regular basis; and
• enlisting the help of professionals in establishing those goals and in making sound, diversified investments.

Because ultimately, of course, what really matters is not how confident you feel, but whether you have a reason to feel confident.

- Nevin E. Adams, JD

Third Time a Charm for Fiduciary Reproposal?

So, advisors, how does it feel to be compared to a termite?

That’s right, a powerful coalition of retirement, union, and so-called consumer protection groups has launched a new attack on retirement plan advisors.

They’re doing so ahead of the president’s State of the Union address, and doing so now because he is expected to throw his support behind the Department of Labor’s fiduciary rule (re)proposal. Yes, that one.

Not that they yet know what they are supporting. In a new website launched to help promote their position, even they say “If the Department gets the rule right…”, apparently relying on the word of the Department of Labor that “…its goal is to make sure that all financial professionals have a legal obligation to put the interests of their customers first when they offer retirement advice.”

We don’t yet know what will be in this latest version. What we do know is that the last version raised significant concerns about its impact on the retirement plan marketplace, especially with regard to plans for small business, for IRAs, and for distributions from qualified retirement plans. We know that they saw fit, as part of an unprecedented power grab, to create a right to impose Labor Department oversight on non-ERISA individual retirement accounts that has not existed since the origins of those programs a generation ago. We know that they didn’t believe that a comprehensive and transparent disclosure of potential conflicts and financial interests were sufficient to preserve the long-standing seller’s exception for business owners who might be considering offering a workplace retirement plan.

As for this newest version, there is reason to think it may go even further; that it might actually prohibit existing plan providers from advising participants on investment options for plan distributions, blocking retirement plan participants from the plan advisor they most know and trust — while at the same time effectively leaving them vulnerable to the solicitations of others outside the plan who often offer more expensive options.

No, we don’t yet know what will be in the latest version — because, having brought two previous flawed versions to light, the Labor Department seems to have developed a case of stage fright when it comes to sharing, much less discussing the new version. Will the third time be a “charm?” Not likely, with so little input from, or dialogue with, those actually working with these programs.

As for those advocacy groups backing this as-yet-sight-unseen regulation — well, they might see advisors as a colony of termites, but the so-called solutions that the Labor Department has put forth thus far seem more likely to burn down the house of America’s retirement than to save it.

- Nevin E. Adams, JD

The saveourretirement.com website is funded by AARP, AFL-CIO, AFSME, Americans for Financial Reform, Better Markets, the Consumer Federation of America, and the Pension Rights Center.