I don’t provide “plan level” 401(k)investment advice; meaning I am not the broker of record for any small business 401(k) plans. In plain language, I don’t sell 401(k) plans to small business owners.
My niche is providing investment advice to individual company 401(k) participants. I thought an article about the main issues facing a small business 401(k) plan sponsors would help a small business 401(k) participant better understand the investment management issues they face.
The investment adviser who “sold” your company 401(k) plan to your company are not in the investment advice business. Really, they are in the product selling business. The products they sell to small business company 401(k) sponsors are high-fee mutual funds.
The annual mutual fund fees are high because a portion of what you pay as an individual 401(k) plan participant is paid back as a commission to the adviser who sold the company 401(k) plan to your company.
The individual 401(k) account investment management problems you face are obvious. You don’t know if the mutual funds on your default company 401(k) menu are suitable for your level of stock and bond market risk. You also have no idea how much it costs you each year to own the mutual funds on your company 401(k) menu.
Worse, your only source of information is a conflicted 401(k) adviser who collects a commission on your company 401(k) mutual funds. Or a call center staffer at your company 401(k) provider 800 phone number is most likely an inexperienced recently licensed youngster.
If your company 401(k) provider is an insurance company that filled your default company 401(k) menu with in-house mutual funds, your problems are even worse. These mutual funds have layers upon layers of fees hidden in fine print.
Your plan adviser should give you a very clear menu of costs and a detailed explanation all compensation paid from your company 401(k) account. This annual compensation should include all mutual fund managers and your plan’s record-keeper.
All you need on your company 401(k) menu is a handful of low-cost mutual funds that can keep up with the investment performance of the popular stock market averages. But where do you go for this level of non-biased information?
The most reliable source of independent, third-party analysis of your default company 401(k) menu comes from a legal “fiduciary.” In plain English a fiduciary is required to put your interests ahead of their own. Even ahead of your company 401(k) plan sponsor; your employer.
You can’t rely on your employer acting as your 401(k) fiduciary. Most small business owners don’t completely understand fiduciary liability.
Fiduciary level investment advice to improve the investment management decisions of individual company 401(k) retirement plan participants does not come from a fancy online dashboard, an online calculator, or a handful of risk tolerance questions.
You need and deserve investment management advice on a timely basis that is specific to the default menu of mutual funds available to you in your small business company 401(k) account.
“What should I buy?”
“How much does it cost me each year to own this company 401(k) mutual fund?”
These questions are not hard. You must find the fiduciary investment advisor who has the sophistication and courage to answer them.
On the Department of Labor web site, I found these details that clearly explain the responsibility of a small business 401(k) sponsor.
“If participants make their own investment decisions, have you provided the plan and investment related information participants need to make informed decisions about the management of their individual accounts? Have you provided sufficient information for them to exercise control in making investment decisions?”
Find out if your small business company 401(k) retirement plan sponsor is complying. Or not. If not, now you know where to go to find this information.
Ric Lager
Lager & Company, Inc.
