In a recent PlanAdviser magazine article, it was reported that a participant in Nestlé’s 401(k) Savings Plan had filed a proposed class-action lawsuit. It alleged a breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).
Frankly, by itself, an article like this wouldn’t have caught my attention. Participant lawsuits alleging fiduciary wrongdoing are so common now that I hardly notice anymore. But this one was different because among its allegations, it charged that the plan fiduciaries had allowed excess fees to be charged to the participants for the managed accounts. The article states that the participants in the plan were offered a managed-account service that was provided by Voya Retirement Advisors. The annual fees were 0.5 percent of assets up to $100,000, 0.4 percent on the next $150,000, and 0.25 percent on assets above $250,000.
Managed accounts have become an increasingly popular service for plan advisers to recommend to their clients. In general, they aim to solve the problem of plan participants lacking the knowledge to invest their retirement money appropriately. In that sense, they compete with target-date-funds (TDFs), robo-advisers, and educational tools such as asset-allocation models.
To my knowledge, there are few who doubt the need of participants of 401(k) and related defined-contribution plans for professional guidance to help select investments among the plan’s menu of options. As we all know, while 401(k) plans have grown parabolically since the mid-1980s, financial literacy in America hasn’t had the same level of growth.
The opportunity is so compelling that I have heard — and I bet you have, too — that some plan advisers are now earning more from managed-account fees charged directly to the participants than they are from the fees they charge for traditional plan services. That is because part of the fees charged by the managed-account service provider is shared with the plan adviser for “distributing” the service. This distribution role subsequently creates a conflict of interest for the adviser, who stands to gain financially from the plan fiduciaries authorizing its availability to its participants.
So, are managed accounts a valuable service that addresses a substantial need among plan participants, or are they an easy sell that plan advisers can use to rev up their income, or both?
The consumers of financial advice are simply seeking one thing when they engage with an adviser — to get honest, expert advice on what to do. And that should be the goal of the plan adviser when working with plan participants.
But unfortunately, that isn’t always how managed accounts are being pitched to plan advisers. Instead, they are presented as a way to increase our fees — to sell our managed-account service and make more money. It is meant to play to our selfishness. If we take the bait, it is a shortsighted mistake and will hurt our profession in the long run.
Plan advisers are a relatively new specialty, having our roots in the broader financial-advice industry. Our newness allows us the opportunity to break from that past and build something much better. But that requires us to take a fork in the road before we have built traditions, cultures, and reputations. Stay on the path built by the broader financial-advisory industry or exit now and take the path of increased reputation, respect, and even income.
Professionalism requires us to put the clients’ interests first, which means to improve their financial standing or decline the work. It requires competence, objectivity, and transparency. But financial advisers, by and large, have abandoned this route, and that is precisely why plan participants are skeptical to seek out the advice of their plan’s adviser. We have a fresh opportunity to choose the better route, and I believe we would be better off for it as would those we seek to serve.
This choice is played out in the evaluation of managed accounts. Plan advisers should be the objective scrutinizer, not the sales team. We are professionals, offering something of value to our clients. Let’s not allow ourselves to become the distribution arm for anyone — record keepers, mutual-fund companies, broker/dealers, or managed-account providers.
I’m not against managed accounts. But let them stand on their own and compete among other managed accounts and other products, like TDFs that are trying to solve the same problem.
Our job is to evaluate and advise. That is professional work, honest work, and valuable work. It’s also what our clients want from us. Let’s forgo a few bucks now so that it can compound into big bucks in the future.
Brian Allen (www.pension-consultants.com) is the author of “Rewarding Retirement: How Fiduciary Committees Can Elevate Workers, Companies, And Communities,” and founder/chairman of Pension Consultants, Inc., a fee-only plan adviser.