I\u2019m still amazed at how often I come across participant-directed 401(k) plans that don\u2019t have a financial advisor attached. Now, I completely get why solo 401(k) plans usually don\u2019t. Most individuals think they can manage things themselves. I\u2019m in that boat too\u2014my solo 401(k) is self-directed, and I handle my own investments. But here\u2019s the important point: the very moment I add an employee, I will hire a financial advisor. And the reason is pretty simple.<\/p>\n
The Travel Agent Analogy<\/strong><\/p>\n I\u2019m often shocked that travel agents are still around in the internet age. Back in the day, unless you had access to their software, you couldn\u2019t book airfare or hotels on your own. The internet changed all that. Now you can book trips with a click of a button. The same is true for investing. Thanks to technology, buying or selling securities has never been easier. Because of that, a lot of people think financial advisors are dinosaurs\u2014like travel agents. But that comparison doesn\u2019t hold water.<\/p>\n What Advisors Really Do<\/strong><\/p>\n The real value of a financial advisor in a 401(k) plan isn\u2019t about picking mutual funds. ERISA \u00a7404(c) requires a \u201cbroad range\u201d of investment options, and, to borrow from Commander Montgomery Scott in Star Trek III, \u201ca monkey and two trainees\u201d could put together a mutual fund menu that checks that box.<\/p>\n The real role of a financial advisor is being part of the fiduciary process\u2014helping draft an investment policy statement, regularly reviewing the fund lineup, and, most importantly, educating employees. That\u2019s where the rubber meets the road.<\/p>\n A Real-Life Example<\/strong><\/p>\n Years ago, I worked at a semi-prestigious law firm on Long Island (sorry, Lois) that had no financial advisor on its 401(k) plan. For ten years, nobody reviewed the investment options. I knew that was a problem the moment I overheard a staff member say he only invested in the mid-cap mutual funds because, in his words, \u201cit represented the middle of the market.\u201d That right there is why you need an advisor\u2014someone to guide participants so their decisions aren\u2019t based on misunderstandings.<\/p>\n Even Index Plans Need Help<\/strong><\/p>\n Some plan sponsors think, \u201cWe only offer index funds or ETFs, so we don\u2019t need an advisor.\u201d Wrong. Yes, index funds generally outperform most active managers, but participants still need education around asset allocation, diversification, and risk tolerance. An all-index lineup doesn\u2019t magically solve those issues. An advisor helps participants understand howto use those low-cost funds effectively, while also giving plan sponsors the ERISA \u00a7404(c) protection they want.<\/p>\n Why I\u2019ll Hire One<\/strong><\/p>\n When I eventually add employees to my firm, I\u2019ll bring on a financial advisor\u2014even though I\u2019ve been knee-deep in 401(k) plans my entire career. Why? Because I know my lane. I don\u2019t have the background or training to do fund analysis or conduct participant education at the level an advisor can. My value comes from my ERISA and fiduciary knowledge. I\u2019ll stick to what I do best and hire an advisor to do what they do best. That way, I keep myself\u2014and my plan\u2014out of trouble.<\/p>\n In short: if you\u2019re running a participant-directed 401(k) plan without an advisor, you\u2019re gambling with fiduciary risk and your employees\u2019 financial futures. That\u2019s not a gamble worth taking.<\/p>\n <\/span><\/p>","protected":false},"excerpt":{"rendered":" I\u2019m still amazed at how often I come across participant-directed 401(k) plans that don\u2019t have a financial advisor attached. Now, I completely get why solo 401(k) plans usually don\u2019t. Most individuals think they can manage things themselves. I\u2019m in that … Continue reading