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401k Plan Consulting Services

401k Fiduciary Advice

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Who is DALBAR?

 

Who is Dalbar?

 


Bryn Mawr Wealth Management

892 County Line Road

Bryn Mawr, PA  19010

Phone:

610-527-3590

Fax:

610-527-2881

 

Click here to download as .pdf

Why Advice Matters

By

Robert Fertman

It happens every day, in companies both large and small.  Every day ordinary people are faced with decisions about investing in their 401(k) plans.  Armed with some very basic information, perhaps a list of mutual funds, some fact sheets with past performance, and a funds prospectus given to them by their employer, people are making decisions about investments that will have tremendous impact on their future. In the absence of a traditional pension plans, and with the uncertainty about the future of social security, these plans are often the single best opportunity that people have to accumulate assets for their retirement.

Sometimes though, in the midst of busy and hectic lives, people often procrastinate and too often never even implement a coherent investment plan.  While some people have the kind of knowledge that enables them to make these decisions easily, many others do not, and sometimes decisions are made in arbitrary ways without a real understanding of how to properly diversify a portfolio or of the risks associated with their investment choices.

In the past, advice has been hard to come by. Employers usually will not provide investment advice to participants, and with good reason: They do not want to be in the position of being responsible for the performance that their employees get.  Most Stock Brokers can provide advice, and sometimes do so for their clients, but because of regulations and liability considerations, they cannot charge for it and their firms will not allow them to do so.  Financial Planners can provide this advice and often do, but they are usually interested in doing comprehensive financial plans, and additionally offering investments or managing assets for fees, or selling insurance.  Just like the brokerage firms, these financial planners are not specifically focused on the 401(k) plan as their core business specialty and take less interest in providing these services (Unless you have very substantial assets and are nearing retirement where you would be rolling the 401(k) plan over to an IRA account).

What people need is Personal, Objective, and Impartial investment advice in a number of areas including:

 

  • Determining Annual Contributions: In order to receive matching contributions, in most cases participants must contribute at least enough money to the plan to fully benefit from the employers contribution. How much should be contributed above and beyond that? This may depend on one’s cash-flow and household budgets, including debt servicing considerations, and the need for other savings such as a down payment a first time home buyer, or college education for a child.
  • Establishing Investment Goals and Objectives: Investment goals vary at different times in a person’s investment life-cycle. Early in one’s career the accumulation of assets and capital appreciation are often the highest priority, whereas in the years prior to retirement reducing risk and protecting investment gains may be the objective. In the retirement years, keeping pace with inflation while maintaining current income might be the priority.
  • Understanding and Determining Risk Tolerance: In a Bull Market people will often say they can tolerate investment risk, because they are making money, but when the markets go down, as they do from time to time, that assessment often changes. The question of Risk Tolerance is crucial because the possibility of losing money always exists and people’s feelings about this and the implication of potential losses to their life situation must be clearly understood, as well as how it changes with time and circumstances.
  • Investing appropriately for ones own Time frame until retirement: Key life events, such as retirement, creating a new family, changes in employment, or  crises such as unexpected illness or disability, death of a spouse, or the ending of a marriage are all situations that happen in life that can alter ones investment time horizon. One must ensure that ones investment strategy is appropriate to the circumstances of life.
  • Choosing an appropriate investment strategy: When Goals and Objectives, Risk Tolerance, and Time Horizons are known, it then possible to select an investment strategy, and an allocation between stocks and bonds. For example, is based on these considerations, should a person have a strategy that is Aggressive? Growth Oriented? Moderate/Balanced? Conservative? Income Oriented?
  • Deciding what asset classes to invest in:  What proportion of assets should be invested in different types of Investments? How much in Large Cap Funds, Mid Cap Funds, or Small Cap Funds? How much should be in Growth or Value? What percent of the portfolio should be outside the USA, and of that how much in Emerging Markets?  What sort of Bond Funds should be used? Should Real Estate Funds or Precious Metals be in the portfolio?
  • Selecting the most desirable funds in the desired asset classes:  Having selected asset classes we need to decide which of the funds that the plan offers can be used to invest for that asset class. We need to look at the performance and risk of these funds as well as how they are combined and used together to make a portfolio.
  • Evaluation Investment Performance: Existing investment options should be evaluated for performance as well as the performance of alternative investments, and changes in the portfolio should be made when needed to replace underperforming funds.
  • Reviewing and Rebalancing the Investment plan: The allocation itself should be reviewed at least annually and should be rebalanced to ensure that the strategy is being applied consistently and also to make any adjustments as circumstances and conditions warrant.

This advice should be based solely on what is good for the person making the investment, and the advisor should not have any conflict of interest that would impact the nature of the advice that is being provided, and would not be compensated differently for any of the investments that they are providing advice for.   Recent changes in the law, and proposed regulation changes are introducing new means for 401(k) participants to get the advice that they need.  The Pension Protection Act of 2006 (PPA 2006) has introduced the new role of Fiduciary Advisors, who are obligated to provide advice in this way, and who are compensated by fees (paid by the participants or their employers) only and not by sales commissions or trailing fees paid by investment companies.  A Fiduciary Advisor must meet specific requirements, and is a fiduciary to the participant that they are advising. That means they must put the participant’s interest before all other, and could be liable if they breach their fiduciary duty to do so.

Registered Representatives and Brokerage firms that sell 401(k) plans are often compensated by commissions and fees that are paid based on the assets that are invested in different investments in the plan. For this reason, they cannot be Fiduciary Advisors, because the source of their compensation is derived from the investment company that markets the 401(k) plan. They have an inherent conflict of interest.

One of the unique benefits that PPA 2006 provides is safe-harbor protection for employers from liability for advice when investment advice is provided to their employee participants by a Fiduciary Advisor who meets all the requirements of the law.  This is a significant change, because it means that any advice that is provided by anyone other than a Fiduciary advisor is not protected, and that the employer is potentially liable for it. So when employers allow 401(k) sales people to provide advice to their participants, they also become potentially liable for the advice that is given, meaning that they can be potentially sued for investment losses, based on a fiduciary breach because they did not offer a Fiduciary Advisor to their employees.

But the biggest reasons why advice matters is it really helps people to:

  • make better decisions
  • avoid common investment mistakes
  • make progress toward their long term investment goals
  • have greater understanding and feel better about their investments
  • really appreciate the benefits that the company is providing for them

For these reasons, as well as the considerations about the safe harbor protections, Employers should offer Fiduciary Advice to their employees as part of their 401(k) plan.

Robert Fertman is President of Bryn Mawr Wealth Management LLC, a Registered Investment Advisor which provides Pension Plan Consulting and Financial Planning. He has been certified by DALBAR, INC as a Fiduciary Advisor meeting the requirements of the Pension Protection Act or 2006.  Securities and Advisory Services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

Robert can be contacted at Bryn Mawr Wealth Management, LLC, 892 County Line Road, Bryn Mawr, PA 19010. (610) 527-3050, or at rfertman@brynmawrwealth.com

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Financial Planning, 401k Participant Consultations, and Pension Consulting are offered through Bryn Mawr Wealth Management, a Registered Investment Advisor.  Securities & Investment Advisory Services are offered through LPL Financial, A Registered Investment Advisor. Member FINRA/SIPC.

No information on this site is intended to constitute an offer to sell or a solicitation of an offer to buy shares of any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. By entering this site, you agree that you are a resident of one of the following states: DE, GA, MD, MN, NJ, NY, PA, WI.

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