Choosing the Right 401(k) Advisor: A Guide to Making Informed Decisions 

When structured and implemented well, a 401(k) plan can be an important component of an employee's financial well-being and state of mind. Selecting an advisor for your company’s 401(k) plan is an important first step to building a plan, as they will play a crucial role in its creation, implementation, and administration. The right plan can help to secure your employees’ financial futures, improve employee morale, and help attract and retain top talent to and in your company.

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A trusted advisor fosters employee confidence, which in turn can help to maximize engagement. No matter how good of a 401(k) plan you create, it’s not helping anyone if it isn’t being used. This is just one of the many reasons we will outline below for why choosing the right 401(k) advisor is critical to delivering this benefit to your employees.

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The Importance of Choosing the Right 401(k) Advisor 

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The needs of most small and medium-sized businesses are different. This makes it imperative that employers choose a competent advisor who can assist in designing and implementing a 401(k) plan that aligns with your company's specific goals and needs. The right advisor should provide guidance on plan design options, investment choices, and other critical factors to ensure the plan is well-suited for your employees' needs.

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Furthermore, a good 401(k) advisor can educate both employers and employees about the plan's features, benefits, and contribution options. This can be done through in-person seminars at your company, informational literature outlining the plan, or simply helping you to be prepared for questions that your employees may have.

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This educational support helps employees understand the importance of saving for retirement and empowers them to make informed decisions regarding their financial future. Perhaps most importantly, it educates them about their options and gives them control over securing their retirement goals.  

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The Risk of Having a Poorly-Designed 401(k) Plan 

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A poorly designed 401(k) plan may result in limited investment options, high fees, and inadequate support services. This can negatively impact employee participation, engagement, and overall retirement outcomes. As noted above, a 401(k) plan that isn’t used doesn’t do any good for anyone, so it’s worth making the effort to ensure the plan is beneficial to all.

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In addition, a subpar 401(k) plan can expose employers to legal and regulatory risks. Failing to comply with the complex laws and regulations from the IRS and ERISA governing retirement plans can lead to costly penalties and potentially even lawsuits. 

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The Three Main Functions of 401(k) Providers 

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401(k) providers typically fulfill three primary functions: the advisor, the custodian, and the record keeper. Each role outlined below must work together to ensure the successful implementation and operation of a 401(k) plan:

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• The Advisor: The advisor's primary responsibility is to guide employers in selecting and managing the plan's investments. They assist in constructing a diversified investment lineup, monitoring performance, and providing ongoing advice to plan participants. This guidance can significantly impact the plan's success. 
• The Custodian: The custodian is often a financial institution that holds and safeguards the plan's assets. They are responsible for executing trades, ensuring proper recordkeeping, and maintaining accurate participant account balances. Employers should choose a custodian with a solid reputation for security and reliability. 
• The Record Keeper: The record keeper is responsible for maintaining accurate records of participant contributions (and that they stay within guidelines), investment allocations, and distributions. They handle administrative tasks such as processing contributions, generating participant statements, and managing compliance reporting. An efficient record keeper streamlines the plan administration and enhances the participant experience. 

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Protecting Your Plan and Employees through the Fiduciary Standard 

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When evaluating 401(k) advisors, it is crucial to consider their history of adherence to the fiduciary standard, which means that they are legally obligated to act in the best interest of their clients. This standard ensures that advisors prioritize the welfare of plan participants, and minimizes conflicts of interest that could compromise the plan's success. 

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In contrast, advisors following the suitability standard are only required to recommend suitable investments, even if they may not be the best option for participants. Employers should prioritize working with fiduciary advisors to provide the highest level of protection for their employees and mitigate potential legal risks. 

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Evaluating a 401(k) Plan Provider 

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Choosing a 401(k) plan provider involves evaluating various factors to ensure they align with your company's needs and priorities. The following key aspects should be considered when assessing potential providers: 

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• Plan Setup and Processing: A good provider should offer a streamlined process for setting up and administering the plan, minimizing administrative burden, and maximizing efficiency. 
• Participant Engagement: Look for providers that offer robust educational resources, user-friendly interfaces, and tools to encourage participant engagement and improve financial literacy. The better employees understand the 401(k) plan, the more likely they are to utilize it.
• Customer Care: Strong customer care is crucial to addressing plan-related inquiries and resolving issues promptly. Ensure the provider offers reliable and accessible support channels so that someone is there to answer your employees’ questions when they arise.

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Evaluating Your Advisor's Expertise, Education, Licensing, and Resources 

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In addition to assessing the plan provider, you should also take care to evaluate your advisor's qualifications. Consider the following aspects to ensure your advisor is well-equipped to provide quality guidance: 

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• Expertise: Look for advisors with experience in the retirement planning industry and a track record of success. They should demonstrate a comprehensive understanding of 401(k) plans, investment options, and industry trends. 
• Education and Licensing: Verify that your advisor possesses relevant certifications, such as Certified Financial Planner (CFP) or Chartered Retirement Plan Specialist (CRPS). These designations indicate a commitment to ongoing education and ethical standards. 
• Resources: Consider whether the advisor has access to a wide range of investment options and resources to provide comprehensive guidance tailored to your employees' needs. 
• Disclosures: Advisors and their firms must report negative actions or significant customer complaints through disclosures to the regulatory agencies, and there are publicly-available platforms through which these can be checked. Do your due diligence to see if an advisor you are considering has any disclosures which may be concerning.

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Financial Advisor Fees and Compensation 

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An employer should also consider the financial advisor’s fees when selecting a 401(k) advisor. Different fee structures exist, and some will cost more than others. Some examples of advisor-related fee structures are based on the percentage of Assets Under Management (AUM), hourly fees, or flat fees.

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Consider the following aspects related to financial advisor fees: 

• Average Fee for a Financial Advisor: While the specific fees can vary depending on the advisor and services provided, the average fee for a financial advisor typically ranges from 0.5% to 2% of assets under management. 
• Financial Advisor Compensation: It is important to understand how advisors are compensated to ensure there are no conflicts of interest. Fee-only advisors, who are compensated solely by their clients, tend to have fewer conflicts compared to advisors who receive commissions or other incentives from providers. 
• Ensuring Fair Financial Advisor Fees: To ensure fair fees, consider obtaining fee quotes from multiple advisors and comparing them based on the services provided. It is also important to review the advisor's value proposition, professional reviews, and the level of personalized service they offer.

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Reducing Financial Advisor Fees 

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If you are concerned about financial advisor fees, there are several strategies to consider:

• Negotiate: Don't be afraid to negotiate fees with your advisor, especially if you have a sizable plan or multiple services bundled together. 
• Fee Benchmarking: Compare your advisor's fees with industry standards to ensure they are reasonable. Industry benchmarking studies can provide insights into typical fee ranges. 
• Review Services: Assess whether all the services provided by your advisor are necessary for your plan. It may be possible to eliminate or modify certain services to reduce costs without compromising the plan's quality. 

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The Bottom Line

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Implementing a 401(k) plan for your company can help to boost morale, attract & retain top talent, and allow your employees to focus on work rather than worrying about their financial future. Selecting the right 401(k) advisor is crucial for both employers and employees, as they will play a major role in the plan’s design and administration.

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By considering the importance of a competent advisor, the risks associated with a poor 401(k) plan, and evaluating the functions of 401(k) providers, employers can make informed decisions to protect their plan and employees. From the outset, creating a plan for your company may seem like a monumental task, but the right 401(k) advisor will help shoulder much of the burden and keep the plan on track.

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Choosing the right 401(k) advisor for your needs can make the process both efficient and effective, so it’s imperative to do your due diligence based on the information provided above.