5 Common Mistakes to Avoid When Hiring a 401(k) Advisor 

Choosing a financial advisor for your 401(k) plan is an important decision, as they are integral to plan administration, performance, and providing competent advice to your plan participants. Advisors bring different levels of experience, specialties, and competency to the table, so hiring a financial advisor should only be done after completing sufficient due diligence to find the right one for your plan.

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This article will help explain how to hire a financial manager for your 401(k) plan by discussing five common mistakes to avoid during your search. To find a holistic financial planner that can put your plan on the right track, follow the advice outlined below.

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1. Hiring an Advisor Who is Not a Fiduciary 

• Not all 401(k) advisors act as fiduciaries, but that distinction can have a significant impact on your plan. A fiduciary is legally bound to act in your best interests, prioritizing your financial well-being over their own. By hiring a fiduciary advisor, you can have peace of mind knowing that their recommendations and actions are aligned with your goals. 
• Non-fiduciary advisors may have conflicts of interest that can compromise the advice they provide. When selecting a 401(k) advisor, always ensure they have a fiduciary duty towards you and your retirement plan. 

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2. Not Asking a Lot of (or the Correct) Questions 

• To make an informed choice, it is essential to ask a lot of questions during the 401(k) advisor selection and hiring process. Don't hesitate to inquire about their qualifications, experience, investment philosophy, and how they approach retirement planning. 
• Ask about their track record and success stories working with clients in similar situations as yours. Inquire about their fee structure and the services they offer. The more questions you ask, the better you can gauge the advisor's expertise, approach, and suitability for your needs. 
• Part of the job of an advisor is sales with a need to grow their own client base. As they are often personable, you may find yourself quickly off track and forgetting questions that you need to ask. Make a list in advance so you can compare answers to the same questions across all advisors that you interview.

3. Hiring the First Advisor You Find 

• It's easy to fall into the trap of hiring the first 401(k) advisor you come across, especially when you're eager to get your retirement planning in motion. This can be a costly mistake, however. Take the time to research and interview multiple advisors to compare their qualifications, services, and fees. 
• By exploring different options, you can get a better sense of the industry landscape, the range of services available, and the expertise different advisors bring to the table. Don't rush the decision-making process when it comes to selecting a 401(k) advisor; it's worth investing time upfront to find the right fit for the needs of your plan. 
• There are many online platforms, including those from the regulatory agencies, that can help you develop a list of potential 401(k) advisors to consider. Make a list, do your background research on those that catch your eye, and schedule in-person consultations with the candidates that appeal to you the most.

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4. Not Knowing the Difference Between Fee-Based and Fee-Only 

• Understanding the different fee structures used by 401(k) advisors is crucial to avoid surprises and potential conflicts of interest. The two most common fee structures are fee-based and fee-only. 
• Fee-based advisors may earn commissions from the financial products they recommend in addition to charging fees for their services. This can create a potential conflict of interest, as they may have an incentive to steer you towards products that generate higher commissions for them. 
• On the other hand, fee-only advisors charge a transparent fee for their services and do not earn commissions from product sales. This fee structure aligns their interests with yours, ensuring they prioritize your financial well-being rather than their own financial gain. 
• Understanding the difference between fee-based and fee-only advisors and choosing one that aligns with your preferences and comfort level can help you avoid potential conflicts and ensure your advisor's recommendations are unbiased. 

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5. Hiring an Advisor Who Only Focuses on One Area of Planning 

• Retirement planning is a comprehensive process that involves various elements, including investment management, tax planning, estate planning, and risk management. Hiring an advisor who only specializes in one area of planning may leave critical aspects of your retirement strategy unaddressed. 
• A well-rounded 401(k) advisor should have expertise in multiple areas of financial planning and be able to offer a holistic approach to retirement planning. They should be knowledgeable about investment strategies, tax implications, and how to optimize your retirement savings within the context of your overall financial situation. 
• By hiring an advisor with a well-rounded skill set, you can ensure that all aspects of your retirement planning are considered, and the financial goals of plan participants are adequately addressed. You will have plan participants across multiple age ranges, and your advisor should be able to properly plan for all of them.  

The Bottom Line 

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Avoiding the common mistakes outlined above when hiring a 401(k) advisor can help you make a more informed decision and enhance the likelihood of developing a high-quality plan for your company’s retirement plan. Remember to seek a fiduciary advisor, ask thorough questions, explore multiple options, understand fee structures, and choose an advisor with a broad range of expertise.

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Taking the time to select the right 401(k) advisor can provide you with the confidence and peace of mind that your retirement planning is in capable hands. A retirement plan can serve to provide many positive benefits to both a company and its employees, but only if the plan is run by a competent advisor and holistic financial planner who sets participants up for success.