(This article appeared previously on MarketWatch.com
Many employers are now providing investment advice to workers in their retirement plans, according to a new Aon Hewitt survey. In fact, nearly half of companies surveyed by Aon Hewitt (44 percent) provide online third-party investment advisory services to individuals, more than a third (35 percent) facilitate the interaction of participants with third-party advisers through the phone, and nearly a quarter (23 percent) allow for face-to-face meetings with professional advisers, according to the report.
“Employers are stressing the concept of financial wellness,” wrote the authors.
But how would you know if the advice you’re getting is good or not? What sort of questions might you ask of your retirement plan adviser? What might you avoid? And what are the “must-haves” with respect to 401(k) advice?
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Set a Goal and Track Your Progress
Experts say the first step to knowing whether you’re getting good advice (in-person, by phone, or through an online service) is defining what good advice is.
“Typically, when we are defining good advice from a retirement perspective, it becomes a readiness issue,” said Sherrie Grabot, President and CEO of GuidedChoice, an advisory service.
And knowing how ready you are requires having a retirement goal, a baseline, and way to track your progress. “Are you getting closer to your goal than you were prior to receiving the advice?” asked Grabot.
From her perspective, having the ability to track your progress, factoring in cash flows and the like, against a goal is a critical part of good 401(k) advice.
So too is knowing whether you are deferring enough of your salary into your 401(k), given your current asset allocation, time horizon, investment goal and risk tolerance, said José Jara, a principal with Buck Consultants, a Xerox Company.
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“One of the more important things that a participant needs to understand is whether they are saving enough,” said Jara. In short, good 401(k) advice will assess — given your specific retirement goals — whether you are saving enough or need to save more.
And remember, meeting with someone once a week might not be enough to be defined as good advice. “I would suggest that the participant evaluate the value of the ‘advice’ to their overall retirement planning,” said Jason Roberts, CEO of the Pension Resource Institute. “For example, meeting once a week or over the phone with someone who tells you how to allocate your in-plan assets may not be enough to get a participant on track.”
That’s not to say that meeting with an adviser isn’t important. For instance, David Weiskopf, senior director of corporate communications at Financial Engines, an investment advisory firm, said a good adviser will “stay in regular touch making sure the participant understands how their strategy is progressing and making any appropriate changes.”
Grabot recommends asking your 401(k) adviser: How do you define success? What is the benchmark or baseline and how will you and I track performance?
Is the Advice Personalized?
Experts also say that good advice is personalized and customized. And one way of telling whether the advice personalized is “if the adviser asks questions about (your) situation whether online, on phone, or in person,” said Fred Barstein, Founder and CEO of the Retirement University Advisor University.
Others agree. “At a minimum, I would want to know whether the adviser can provide me with individualized guidance on the level of deferrals necessary to meet my retirement objectives given my current allocation and risk tolerance,” Roberts said. “Many times this approach will have a greater impact than simply helping someone construct a portfolio.”
Experts also say that good advice goes beyond asset allocation and the like. In fact, good advice would be holistic, where an adviser addresses financial wellness issues such as debt and assets outside of your 401(k). “They should look at a participant’s overall financial picture when making recommendations,” said Weiskopf. “Then they can build a personalized solution specific to a participant’s situation and needs.”
Of note, Weiskopf also recommends asking a 401(k) adviser for advice about claiming Social Security. Ask: When should I claim Security, how long should I defer claiming Social Security, and how should I maximize my 401(k) assets and Social Security payments together? You might also add to this list a question about working during retirement and ways to create tax-efficient income given all your sources of income during retirement.
Is the Advice Delivered in Person?
Other advisers, including those who have a bias (it’s their business model), see in-person, independent participant advice as becoming absolutely critical for successful retirement outcomes.
“From the participant point of view, in person and independence are key,” said Mark Davis, a senior vice president with CAPTRUST Financial Advisors. “We have learned that most participants still strongly prefer to receive their advice from a face, not an interface.”
To be sure, firms and individuals who deliver investment advisory services online or over the phone might disagree. But even Grabot recommends avoiding any service that is not personalized. “In today’s technology world, you can get a personalized solution for less than almost all “one-size-fits-all” type of solution,” she said.
Is the Advice Objective?
Regardless whether the advice is delivered online, face-to-face, or via a customer service representative over the phone, experts say good advice is free from conflict and is objective. Plus, it comes from a fiduciary. Rick Meigs, the president of the 401khelpcenter.com, recommends asking: “Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide me?”
Bard Larsen, an executive vice president of ERISA Fiduciary Advisors, agrees. “A participant will want to know if the adviser is compensated the same regardless of the advice provided,” he said. “The adviser should have no self-interest involved in making recommendations to the participant,” he said. “The adviser must act in the best interest of the participant.”
In fact, Roberts said one must-ask question of any 401(k) adviser you have designs on working with is whether they stand to benefit financially from recommending one investment product or service over another.
And the following are among the questions Meigs said you ought to ask: Who is paying you to provide me with this investment advice? How are you paid to provide me with this investment advice? Do you or your firm receive any commissions or other revenue based on your recommendations?
Others say good advice might mean walking away from 401(k) adviser. “Participants absolutely must be completely clear as to how any adviser will be compensated for the advice he or she is giving,” said Davis. “They should ask if the adviser considers himself or herself to be a fiduciary to the plan and if the answer is ‘no’ then the participant should move on…fast.”
You might also walk away from any advice or service that, according to Grabot, “does not clearly and easily disclose fees.”
Is the Adviser Qualified?
As a side note, Davis said, “small plan sponsors need to be careful not to turn their participants over to brokers or advisers who may simply be providing participant services to troll for additional retail business opportunities.”
Said Davis: “They (small plan sponsors) should insist that the people providing participant advice do so as plan fiduciaries, without conflict of interest and without searching out additional business from participants.”
In addition, ask the adviser point-blank: Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
Experts also suggest vetting the qualifications, experience, education, and knowledge of the advisers providing you with 401(k) advice.
For instance, Meigs recommends asking your 401(k) adviser: What experience do you have, especially with people in my circumstances? What credentials and training do you have and can you explain why they are important?
What to Avoid
Knowing the difference between bad advice and good advice can also help you avoid making mistakes with your 401(k) and other money. Not surprisingly, experts say there’s plenty of 401(k) advice to avoid.
For starters, don’t pay for advice if you’re investing only in risk-based model portfolios, target-date funds and the like.
And, if the advice is active or tactical, be very clear on the value proposition. “It’s tough to prove value over the long haul, and retirement is a long-haul, with tactical allocation,” said Grabot. “If you are paying more for the service, make sure the value proposition works.”
Also, Roberts and others recommend being leery of advisers moving assets out of your 401(k) plan.
“I’d recommend avoiding advice to move assets out of the plan, in service or into a brokerage window, as this can impact fees significantly and, sometimes, tax liabilities,” Roberts said. “Participants are likely paying for someone to help ensure that the plan offers a broad range of options that are monitored and replaced. Accessing investments through the brokerage window negates the value of something for which they may already be paying.”
Other advisers are concerned about IRA rollovers too. “If an adviser encourages a participant to roll assets out of a plan and into an IRA with that broker or adviser that should be a major red flag,” said Davis.
By way of background, Roberts, Davis and others are not alone in their concerns about advisers pushing IRA rollovers. Indeed, regulators, including FINRA, have recently issued warnings to 401(k) plan participants who are considering an IRA rollover.
The 401(k) Advice Must-Haves
As for 401(k) advice “must-haves,” Weiskopf said one is working with “an adviser who can provide help through every phase of (your) life — from saving to investing to actually generating the income needed to enjoy a good retirement.”
Good advice also requires having a good employer, a good plan sponsor. “Endorsement and oversight by the employer,” said Roberts. “If the employer prudently selects and monitors an advice provider, then they will not be responsible for monitoring the individual advice or liable for any losses stemming from that advice.”
Also, if plan assets are used to pay for the advice, then the employer must review and monitor the 408(b)(2) disclosures of the advice provider
, said Roberts. “Consequently, the employer has some skin in the game so the participant can benefit from the additional layer of due diligence,” he said.
Speaking of plan sponsors, Meigs recommends that 401(k) plan participants drill their employer about the following: What was the process you used to select this adviser? How do you plan to review and monitor the service they provide? Who is paying them? And do you consider them to be a fiduciary under ERISA with respect to the recommendations you provide me?
For his part, Larsen plan sponsors should prohibit any “endorsed” plan adviser who meets with participants from selling outside products to participants and attempting to have participants remove their money from the plan and roll it over to an IRA.
And still others say that clarity with respect to fees and the service are must-haves. “Understanding what you are purchasing is extremely challenging for the average participant,” said Grabot. “The explanations need to be simple to understand. The decision on the methodology should be understood at the plan sponsor level and available to participants.”
And, Grabot said, whatever solution is in place should be backed by technology that “ensures participants are receiving consistent advice whether delivered by person, phone, paper, or the web.”
Robert Powell is a MarketWatch retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.
By Robert Powell
Robert Powell writes about retirement issues for MarketWatch.com and produces the Retirement Weekly subscription newsletter.
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