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Empowering plan fiduciaries with a process for selecting an investment advice provider
Would anyone debate that selecting an investment advice provider is not a fiduciary act? We think not. What consultant would recommend funds solely based on their reputation? What fiduciary acquiesces only because another non-fiduciary happened to offer certain funds? Everyone knows that past performance is not a reliable predictor of future returns. In fact, we submit that the choice of an advice service, particularly one that has discretion over a participant's account, may be a more important action than selecting funds for the menu.
Consider the following:
1. Few people dispute the fact that asset allocation is responsible for at least half of the return in a person's account. If that is the case, one asset allocation provider has, by definition, at least as much influence on a person's account as the performance of the entire menu.
2. There is considerable empirical evidence that above average investment performance has less effect on retirement outcomes when compared with other actions that impact the amount of savings. Putnam pioneered these findings in 2006 and Principal refreshed the analysis last year [Pursuing "Retirement Plan Success" During Participants' Accumulation Years. Thought Capital, April, 2010].
3.Most of the components in an advice service provide for modeling a customized solution thereby empowering and facilitating the findings explained in point #2. The resource brings to life, in usable and actionable form, abstract ideas that most participants have great trouble grasping. Not insignificant is understanding how a particular allocation affects retirement planning and quantifying how using different allocations impacts other variables.
So why is it that the industry norm is to simply use the service marketed by the record keeper? Few, if any, questions are asked. This reality is particularly troubling because many of the administration firms do not disclose compensation received from the advice provider. Perhaps part of the explanation is that a hand-full of vendors dominate this space. What makes this practice even easier to perpetuate is a couple of the names are ubiquitous, almost household, in nature. But is defaulting to commonly known firms adequate self-defense for a fiduciary if the action is challenged? What kind of process is that? As a fiduciary, the plan sponsor has a responsibility to implement the same type of process to evaluate their participant advice provider as they do to determine the effectiveness of all other aspects of their plan.
At Financial Soundings, one of the first tasks we completed was an RFP for interested parties to use in comparing participant advice service providers. Please have a look here. We continue to be surprised by how few plan sponsors conduct meaningful due diligence in selecting a participant investment advice resource.
If choosing an investment advice and retirement planning provider is so important, how should a plan sponsor go about engaging a vendor and monitoring the outcome? The plan's consultant is the logical source for facilitating the process. Some firms simply need a resource like our RFP and education about how to orchestrate the project. If you are wondering if this is a service you should add to your practice, be sure to read next month's newsletter.
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