When Loyalty Leaves You Liable
“It is a truth universally acknowledged, that a plan sponsor currently in partnership with a plan advisor, must be reluctant to make a change without a really good reason.” OK, Jane Austen didn’t write that. But the relationship between plan sponsors and plan advisors might have inspired her if she were writing today. My experience shows that the typical plan sponsor is often reluctant to consider changing the plan’s advisor. Their reasons range from inertia, to an instinct to preserve the status quo to faith in the familiar. The best way to decide if a change is necessary is to conduct an objective, third-party review.
Awkward But Necessary
Leaving a plan advisor in place without an objective, regular outside review may avoid awkward conversations, but it can cause real trouble. The implication of making a change is that the current advisor has done something wrong. But loyalty to a plan advisor isn’t a virtue when it leaves the plan and sponsor vulnerable. An outside plan review supports the plan sponsor’s fiduciary duty and confirms that the plan advisor is meeting obligations to the company.
Liability Without Autonomy
The plan sponsor with fiduciary liability is responsible for fees that are too high, costly plan structures and unnecessary services — even if she had no hand in selecting the advisor or designing the 401k plan. Often, sponsors have the fiduciary responsibility for the plan but no authority to make changes. Novice plan sponsors may not feel knowledgeable enough to contradict previously made decisions. Tenured sponsors may not want to challenge the advisor’s relationship.
Good Plan Hygiene
Plan sponsors don’t need to identify a problem to have an outside plan review. In fact, there are several reasons why a plan sponsor having fiduciary liability should conduct an objective plan review:
- Inertia: Most plan sponsors assume that the plan’s advisor and the current 401k plan design are sound choices. If your 401k plan is successfully benchmarked annually, then you may feel confident that the fees, expenses and rates are appropriate. The plan advisor can succumb to this same inertia, especially if a change would mean lower fees for them. Why fix it if it ain’t broke?
- Plan Growth: Some plan costs are variable, depending on the amount of money the plan manages. These fees are often sized to provide a certain amount of compensation to the plan advisor. As the company and plan grow, the fee percentage doesn’t change, but the amount the advisor receives does. There are also buried fees, the kind that aren’t administrative or investment related, baked into new plans and left to run amok. As I said in April 2018, “A $10 million plan doesn’t cost the same to administer as a $30 million plan.”
- Change is Constant: 401k plan structures reflect the prevailing business, financial and social environments when they were first designed. Plans need to change as technology, fund types, and fee structures change around them. The best practices that informed the original plan designed have evolved and your company’s 401k plan must evolve as well.
- Big Names Aren’t Always Better: Companies who are designing their first defined contribution plan find comfort in the power of a big name vendor. New plans tend to be relatively small, and their sponsors are happy to have what everyone else has. As plans mature and grow, the plan and the vendor should be re-evaluated for how they serve the current plan.
- Relationships: A long-time plan advisor develops relationships within the company or has personal relationships at a high level that originally earned her the business. An advisor who has a personal connection to a decision-maker in the company may be an expert in investing or wealth management but may not have experience designing 401k plans. It’s natural for these advisors to use a vendor they trust in their primary work, or to make the safe choice of a ‘Big Name’ vendor. But neither choice may be exactly right for the new plan.
Peace of Mind
The new year is a traditional time to make a clean sweep or start a new habit. If you’re a plan sponsor who holds fiduciary risk, then change your habit of unexamined loyalty to your plan advisor in 2019. Regular third-party plan reviews can provide peace of mind. An expert, objective review of your 401k plan benefits employees, the plan sponsor and the plan advisor. If a review confirms that the plan and the advisor are performing well, then the plan sponsor gains peace of mind. If a review reveals issues, then the plan sponsor can address them before they cause real trouble for everyone.