Plan advice: All set? Maybe, maybe not! Part 2: The all-important difference between information and advice.

September 16, 2011 (PLANSPONSOR (b)lines) - Not just a word game – “information” and “advice” have very different fiduciary and legal implications. Many employers have a false sense of security.  Do you?

Synopsis of Part 1 of this article: (Link to Part 1:  

  • Plan-level decision makers are fiduciaries 
  • Fiduciaries are held under ERISA to a Prudent Expert standard of conduct, and are required to hold the participants’ interests above all else 
  • Providing advice for compensation is a fiduciary act, so an advisor becomes a co-fiduciary 
  • Most service providers avoid fiduciary status by providing information instead of advice 
  • The information provided is useful, but you are on the hook for any decisions made 
  • As non-fiduciary service providers, they are not obligated to place your participants’ interests above their own business interests.  This is the key point. 
  • Non-fiduciary service providers can be great partners, but don’t kid yourself about who is in the bull’s-eye if a regulator or plaintiff’s attorney comes knocking  
  • Using an independent plan adviser, to compliment your existing service provider relationship, can lead to better results with less liability 


What is an independent plan adviser?  

  • Independent – sitting on your side of the table; not affiliated with the plan’s other service providers; objective; serving the best interests of your plan and its participants 
  • Plan – a plan adviser is more than just an investment adviser.  Retirement plans are a quirky, specialized world of their own.  A good plan adviser will be able to help with all aspects of running a successful plan, including: regulatory and plan design issues; investment policy, process and governance matters; employee enrollment, communication and education activities; workload and process efficiencies – the whole business of plan management 
  • Adviser – an adviser is a partner that makes intelligent recommendations, shares responsibility and adds value through specialized knowledge and experience 


What’s it cost, and who pays?  The cost of working with an independent plan adviser varies quite a bit, depending upon the circumstances, such as: 

  • Plan size 
    • If the adviser is accepting fiduciary responsibility, the advisory fee would typically take the amount of plan assets into consideration 
    • The number of physical locations to be serviced will influence the cost 
    • The number of plan participants will also impact the workload and direct costs 
  • Scope of the engagement 
    • Is it all-encompassing “soup-to-nuts” service? 
    • Is it a limited engagement, such as investment advice only 
  • Complexity 
    • How much time will be involved 


It’s always dangerous to generalize, but as broad “ballpark” estimates, full-service advisers might charge 25 basis points (0.25% annually of plan assets) for plans with roughly $5 million to $25 million in assets.  Smaller plans often pay more and very large plans may pay less than 10 basis points.  Limited engagements start at a few thousand dollars and rise from there depending upon the scope of the work. The adviser marketplace is a competitive one, and good value can be found. 


As to the question of, “Who pays?” it can be the employer, the plan or the plan provider. 

  • Some employers prefer to pay directly for these services 
  • The costs can be paid by the plan – pro-rata, per head or potentially out of “revenue sharing”.  (Revenue sharing consists of 12b-1 fees and/or sub-transfer agency, “sub-TA” credits paid by many investment providers to plan brokers or recordkeepers.)   
Increasingly, if the economics of a particular plan justify it, providers will create a budget for payment of an independent adviser out of the revenue they are receiving.  In a way, it comes out of their profit margin, but many are willing to do it to strengthen the client relationship.

Price v. Value: As with everything else, there can be quite a difference between price and value, so the buyer needs to be astute.  A low-end adviser with limited experience can cost a plan a lot of money in terms of lost opportunity, bad decisions or potential liability.  The best advice we can give on this issue is to find the most qualified adviser you can, and to then negotiate an arrangement you can both live with. 


What qualities should you look for in an adviser?  Ultimately you want to find the right combination of knowledge, trust and chemistry.  Some questions you may want to think about: 

  • High-level 
    • What is their mission/philosophy/approach? 
    • Do they have a history of improving other plans? 
    • What is their client turnover? 
    • Will they lay out a vision for your plan? 
    • Can they help you to evaluate provider options if/when that time comes? 
    • Do they have any history of regulatory complaints or litigation? 
  • Business arrangement 
    • Exactly what services are included? 
    • What’s the cost? 
    • Is the arrangement open to modification? 
    • Are any guarantees offered? 
  • What is the experience level of the people that will be working on your plan?  
    • Investments 
      • Have they been in the business long enough to have lived through the full range of market cycles?  This sort of hands-on perspective can help plan fiduciaries and participants when the going gets tough. 
      • Do they have the training and experience to engage in original research and analysis, or are they simply going to be presenters of other people’s work? 
      • Do they have any professional credentials or accomplishments?  Be careful of the “alphabet soup game”.  Some of those letter designations are relevant and others…  Feel free to ask tough questions. 
      • What will they do to implement or improve an investment policy and prudent process for your plan? 
      • What degree of fiduciary responsibility will they accept, and what E&O coverage do they have? 
      • Will they construct asset allocation models for participant use?  If so, how do they approach this task? 
      • What is their philosophy regarding investment menu construction? 
        • How many options, and why? 
        • To what extent are plan demographics considered? 
        • Are sector, region or alternative asset classes routinely utilized?  Why or why not? 
        • What accessibility tools are provided to help participants use the menu appropriately? 
        • What is their view on:  
          • Self-directed brokerage accounts 
          • ETFs, separate accounts, other investment structures 
          • Index v. actively managed funds 
          • If a provider change is also contemplated, how would they advise you on the conversion – mapping or cash?  
          • QDIAs 
            • Which do they favor? 
            • How would they be used? 
          • If stable value is or will be used, what is the extent of their knowledge?  How do they feel about general accounts v. separate accounts? 
    • Plan design 
      • Can/will they review your plan design? 
      • Have you elected the features the will get the best results? 
      • If you encounter “testing” issues, will they be able to offer solutions? 
    • Service integration 
      • What relationship do they envision with the plan’s other service providers?   
      • What coordination will take place? 
    • Participant services 
      • Accountability for results 
        • What metrics will be measured? 
          • Participation rate 
          • Employee contribution rate 
          • Rationality of individual asset allocations (individual diversification or utilization of age or risk-based asset allocation models) 
      • On-going enrollments and education 
        • Will a needs analysis be performed? 
        • How tailored to your employees will the education content be? 
        • How will it be delivered, and what will determine the frequency? 
        • Will advice be given to individual participants?  If so, how?  
      • Other participant communications 
        • Who will create the content and how targeted will it be to your organization and its unique culture? 
        • How/when has the advisor communicated with other employee groups in the past? 
          • During market crisis?  
          • At times when payroll increases are about to take place?  (to try to encourage deferral increases) 
          • At benefits fairs or other organizational events? 
        • What media are utilized? 
          • Print (newsletter articles, posters, paycheck stuffers, statement messages, bulletins, etc.) 
          • Electronic (email, intranet, web casts, on-demand video, DVDs, etc) 
          • In-person ( group or one-on-one meetings) 
Overall, are they the right partner to improve employee results, while helping you to manage a tight plan?


Let’s try to sum this up:  Fiduciaries are held to a prudent expert standard under ERISA, and are accountable to participants for their actions.  Yet, many are relying upon their plan vendor “to do the right thing” on their behalf.  Remember, most often, plan vendors avoid fiduciary status. 


An independent plan adviser can help you to bridge the gap this situation creates.  They can serve as a co-fiduciary and help you to manage your plan to the prudent expert standard by which you will be judged if your plan is ever subject to examination or litigation.  The right independent plan adviser can help manage plan costs, improve the plan’s investment menu, help employees achieve better asset allocations, improve the participation and savings rates of your employees, reduce your risk exposure, and improve overall satisfaction with your plan. 


If you have a great vendor, then the scope of an independent plan adviser’s engagement can be limited accordingly. This should reduce the cost.  In recognition of the “fiduciary gap” some vendors will cover the cost of an independent plan adviser.  Naturally, such willingness is dependent upon the economics of a particular plan.   


If you truly are “all set” (you already have an adviser who scores well on the criteria outlined above, or you have this prudent expertise in-house), then congratulations!  If not, then it’s time to take action: 

  • Have a discussion with your service provider about fiduciary status and independent advice. 
  • Establish criteria for an adviser you would want to hire.  This article should equip you to start a basic RFP or search checklist in-house or to streamline process with a consultant, potentially saving you some money.   
  • Select candidates to screen.  Ask around, and also seek thought leaders from the industry.  If you have a large plan, advisers will travel. 
  • Initial responses will give you an indication of costs and payment options. 
  • Meet internally to decide whether to proceed.  
    • If not, check your fiduciary liability insurance coverage 
    • If so:  
      • Interview finalists 
      • Finalize negotiations 
      • Agree on expectations and on-going measurements of success 
      • Get started 


While this may seem like a lot to bite off, it is a valuable and logical process that is likely to enhance the retirement security of your workforce, while enhancing the quality of your sleep. 


Jim Phillips, President, and Patrick McGinn CFA, Vice President, Retirement Resources  

Patrick and Jim have over 50 years of combined investment and retirement plans experience. Retirement Resources in a Registered Investment Advisor that helps employees retire with greater security, while helping employers manage workload, costs and fiduciary liability.  



NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.