Management guru Peter Drucker once said that “culture eats strategy for breakfast.” In this analogy we zoom out and look at the business overall to apply his sentiment. It implies that regardless of growth strategy, the behaviors and beliefs of your team will truly determine the direction of your business. If your goals and strategy do not align with the culture, Drucker would suggest doom on the horizon.
So how does this theory relate to retirement plans? We’re glad you asked.
Zoom in with us to consider one of the most important benefits offered to employees: retirement plans. Your fiduciary role as a decision maker for your organization’s retirement plan comes with the ability and responsibility to impact the future now. The plan decisions made by your committee today will help lay the foundation for golden years to come. This is why it is crucial to work with a consultant who specializes in retirement accounts.
The same adage, and desire to create strategy compatible with culture, should be applied to retirement plan design. Not only should your plan consultant excel in plan design, he or she should also take the initiative to understand your employee’s behaviors and beliefs in order to institute the most effective retirement plan design. Gaining deeper knowledge about plan participants will allow your consultant to make decisions informed by data and through the lens of employee interaction with the plan. This approach requires both financial expertise and a keen sense of human behavior.
Very often retirement plan design is only one arm of a consultant’s multi-faceted business profile and retirement plan clients are added as an extension of a personal relationship with an executive at the client organization. While it’s true that referrals allow for the evolution of an already trusted relationship, it’s important to make sure all skill-sets, expectations and objectives align to offer the best outcomes for all parties involved. If your advisor is not a dedicated retirement plan consultant, you could be leaving money on the table.
Not sure if your advisor is a dedicated retirement plan consultant? Ask yourself these six questions and you'll find the reasons why a dedicated retirement plan consultant can make an impact on your 401k or 403b outcomes and governance.
1: Is he or she willing to accept fiduciary responsibility?
It is important for a plan consultant/advisor to be able to explain the different levels of fiduciary duty, 3(21), 3(28), 3(16), Named Fiduciary, etc., and for that consultant to clearly detail how they intend to fulfill their fiduciary duty. As plan sponsor, you should fully understand what role you plan consultant/advisor is playing and how all of the other required services are being accomplished.
2: How well-versed is he or she in ERISA specifics and compliance?
Plan sponsors often look to their consultants for guidance concerning errors, plan document updates, legal notices, and other plan specifics as regulations change and issues arise. He or she is the person you worked closely with to develop the plan so naturally you seek their counsel to ensure compliance. Many consultants are incredibly proficient in financial principles but don’t specialize in retirement plan design, creating a knowledge gap in the arena of ERISA-related queries. If this is the case for you and your consultant, you may find yourself being directed to legal counsel for account management questions, which can diminish the quality of the relationship with your advisor over time. A dedicated retirement consultant will have extensive knowledge in the fiduciary law complexities and regulatory compliance, and will be able to provide guidance as it relates to your unique business profile over time. Furthermore, he or she will be proactively studying trends and researching potential outcomes to help guide you make decisions that are in the best interest of plan beneficiaries long-term.
3: Does your current advisor spends most (if not all) of their time just talking about mutual funds?
Is your current advisor spending too much time adding and removing investments instead of proactively seeking ways to optimize the plan design? Plan design needs to be aligned with how your employees actually interact with the plan. Your appointed advisor needs to start with questions that judge the investing acumen of employees and their ability to use the investments in the plan properly. This will allow your plan to be more successful in creating positive participant retirement outcomes. Historical fund performance needs to inform - not dictate - future decisions.
Per the September 2018 Vanguard Institutional Advisor’s Alpha: “Several years ago, Vanguard released a study in which we used a sample of over 3,500 funds and over 40 million hypothetical outcomes to quantify the impact of chasing fund performance based on selling underperformers and replacing them with top performers using a three-year evaluation window. The study found that it could cost between 160 to 400 basis points per year in lost returns.”
Focusing on money managers and whether they have surpassed their specific mandate will most likely create a time discrepancy where your committee spends a great deal of time and focus on decisions that have very little impact on participant behavior and outcomes. A dedicated retirement plan consultant will merge data and employee behavior to choose plan funds that will perform well for your beneficiaries long-term, based on the way employees interact with the plan.
4. What is the plan consultant/advisor’s perception of your company and culture, and how have they used your employee profile to customize your plan offerings?
Every organization has a unique culture and employee profile. This requires a personalized level of service to ensure that each client receives plan recommendations that serve their specific needs. Think about the conversations and interactions you have had with your current plan advisor. Has he or she taken the time to independently assess your company culture and support team in order to develop a plan that prioritizes your organization’s goals in alignment with the strengths of the platform that you utilize? Or does your consultant work with a select few recordkeeping platforms because its more efficient for their business? It’s important to work with an advisor who is knowledgeable in investment best practices for small and large organizations, and who will approach your plan design strategy with singular focus.
A dedicated retirement plan consultant will continuously analyze and merge fund performance data and your employee profile to advise on the best long-term solutions for your organization.
5. Does your advisor charge fixed or asset-based fees?
Many plan advisors determine fees based on asset performance within the retirement plan. This can encourage chasing short-term fund performers to increase their profit. As we discussed above, this may be in the best interest for that advisor’s bottom line but not the case for your plan beneficiaries. Essentially your advisor will nurture your account the same amount each year but their fees will continue to grow over time as your plan assets increase.
But this is not the fee structure for all advisors. We recommend working with a dedicated retirement consultant on a fixed-fee basis to help ensure the interests of your company, your plan beneficiaries and the advisor align.
6. What is your current advisor’s business objective for working with your organization?
Unfortunately, the end-goal of some advisors is to use your organization to solicit new business separate from your plan offerings. Some advisory firms are in the business of offering advice to the company retirement plans so that they have exclusive access to sell your employees life insurance, annuities, or financial advice. Being able to assess conflicts of interest is a part of your fiduciary role as a decision maker for your organization’s retirement plan.
Your employees deserve retirement plans that work as hard as they do. Invest in their future and yours. We invite you to request an introductory call with one of the consultants/advisors at Guidance Point Retirement Services.