Fee-based advisors

[Bird]

I'm the TPA for a 401(k) plan that is considering changing their investments. They have about 25 participants, all with individual brokerage accounts (it's not as bad as it sounds, but obviously there's room for improvement).

One of the things they're considering is using a fee-based advisor (hourly) to advise the participants and assist them with investments offered under a mutual fund platform.

I always thought that this arrangement would make the advisor a fiduciary and that no one in their right mind would want that. But I thought I'd throw it out there for discussion - is this common/uncommon, problematic or not? I guess the new pension bill, if it ever gets passed, may have some relief in it, but I'm sure that this particular advisor is not even aware of the issue.

Any comments welcome.

[jpod]

Nothing dishonorable or dangerous about being an ERISA plan investment advisor/fiduciary, at least if you're good at it. The potential prohibited transaction issues come into play if the fiduciary is receiving revenue from third parties.

[GBurns]

Is it the Plan Sponsor who will be selecting and providing this investment advisor, or will it be the participants who will freely choose whomever they each wish?

[Bird]

The plan sponsor will select the advisor.

Thanks for the feedback so far.

[four01kman]

Using fee-based advisors is becoming more and more common. Sometimes the plan sponsor picks the advisor and sometimes each participant has that right. This is becoming a larger part of my practice.

[Kirk Maldonado]

Jim:

While I realize that you aren't completely unbiased because you are a fee-based advisor, I still think it might be useful for some of the readers if you explained the advantages and disadvantages of using a fee-based advisor.

I should probably disclose two things. First, in the distant past, I worked with Jim on a project that lasted longer than a year, and I hold him in high regard. Second, based upon my rudimentary understanding of the situation, I think that using a fee-based advisor makes sense, but I eager solicit opposing viewpoints (so as to clear up any possible misconceptions that I might have).

[Ron Snyder]

The big negative with a fee-based advisor is that the plan may be required to pay greater expenses in connection with the administration of the plan. However, most fee-based advisors who are worth their salt will obtain at least as much savings in investment management fees, 12b-1 fees, etc. as they charge the plan. The smaller the plan the more likely it is to realize savings through such an arrangement.

[Kirk Maldonado]

vebaguru:

Thanks for your input.

[joel]

I'm the TPA for a 401(k) plan that is considering changing their investments. They have about 25 participants, all with individual brokerage accounts (it's not as bad as it sounds, but obviously there's room for improvement).

One of the things they're considering is using a fee-based advisor (hourly) to advise the participants and assist them with investments offered under a mutual fund platform.

I always thought that this arrangement would make the advisor a fiduciary and that no one in their right mind would want that. But I thought I'd throw it out there for discussion - is this common/uncommon, problematic or not? I guess the new pension bill, if it ever gets passed, may have some relief in it, but I'm sure that this particular advisor is not even aware of the issue.

Any comments welcome.

You may want to give serious consideration to a menu of no-load Target Date funds and "fagetaboutit"

Joel

[Bird]

Thanks for all the replies; this was helpful.

[rcline46]

Joel, that suggestion does not eliminate the need for investment advice. How does an employee pick the best fund for their situation? It matters not what funds are offered, most employees still won't know which is the best for them.

[four01kman]

Thanks for the good words Kirk.

The role of a fee-based advisor can be open ended. In this situation, the employer and the employees both need help. The employer in deciding what funds to offer employees. The employees in deciding what funds to put their money.

Whether the record keeping costs will increase is a function of the provider chosen. In some situations, the advisor can put a program together that is less expensive than a bundled program.

This is not a black and white area, but one with many shades of gray.

[Guest WantsToLearn]

Ok.So I know that I would be considered a fiduciary if I am an investment advice, and provide investment advice to the plan.

But what if I do not hold the assets, they are at another financial institution, and the plan hires me to provide investment advice to participants? I cannot be considered an interested party – right? If so, that would mean that the exceptions under the Pension protection act would not really apply to me, as it seems that it applies only when you want to sell the plan assets at your broker-dealer or owned by your broker-dealer – right?

This is a cool feature- you can actually click on the quote button of a post, and post is quoted in your next post...but you guys probably already know that. I am getting used to it- why I am excited.

I saw this and decided to post my quest here- becaise it looks to be along the same lines