In business, a lot gets done based on personal relationships. Maybe you have a neighbor who is an insurance broker, so when it came time to buy liability insurance for your business you had an easy place to turn. Maybe your sister is an accountant, so you didn’t have to look far for a CPA you can trust. The same is true for many employers who decide to offer a 401(k) plan—a personal relationship with someone in the industry provided a natural choice for the new plan’s service provider. I know that’s been the case for me in the past, as I have several friends who have hired my firm to help manage their company retirement plans.
I wondered how common this scenario is, so my firm commissioned a national survey of about 1,000 employers to ask them about how they chose their 401(k) service provider. We learned that 14.1% of those surveyed picked a provider based on a pre-existing personal relationship.1 Based on the total number of 401(k) plans in the country, that could mean as many as 70,000 plans representing 3.3 million workers and nearly $100 billion in assets fall into this same sort of personal 401(k) provider relationship.2
There’s nothing necessarily wrong with this trend, but as a 401(k) fiduciary for your company’s plan you have a personal, legal obligation to make decisions in the best interests of your employees participating in the plan. That extends to your ability to prove you hired your 401(k) providers—vendors like brokers, investment advisers, third party administrators, and recordkeepers—not just because you liked them, but because they are doing a good job for the benefit of your employees and plan beneficiaries. My general rule of thumb is this: Don’t hire somebody you can’t fire, especially in a 401(k) plan. Here’s why that’s so important, and what you can do to make sure you’re receiving the right level of service.
Are Personal 401(k) Provider Relationships a Problem?
Part of your job as a 401(k) fiduciary is not only making reasonable choices for the good of your employees, but also documenting those choices. If there’s ever a question about any part of your plan working against your employees’ best interests, you’ll want to be able to demonstrate that you made informed choices. In the case of your personal relationship with any of your company’s 401(k) vendors, that means reviewing your options and documenting your rationale for hiring who you did beyond the fact that you trust them or you like them.
Unfortunately, that can often be difficult or awkward when it comes to mixing business with personal relationships. In the same survey of plan sponsors I referenced earlier, we went on to ask two questions about how employers research their plan and their provider options:
• “How much time recently have you spent researching 401(k) ideas?”
• “How likely are you to compare your 401(k) plan to others in the next two years?”
Among those respondents who were in a personal provider relationship, 41.7% said they spend no time researching 401(k) ideas compared to 33.3% of all respondents—meaning those who have a personal relationship with a provider are less likely to research 401(k) than other employers.3 Additionally, employers in a personal provider relationship were also more likely than the rest to say there was a low likelihood of comparing plans in the next two years.4 This may be because when someone trusts a close friend or relative to help them with something, that trust is enough for them to feel like they’re getting the right level of service for the right value. But that may not always be the case, which is why—as uncomfortable as it might be—I only allow my friends to continue working with my firm if they commit to periodically monitoring our costs and investment performance, and every three years or so thoroughly reviewing our performance and comparing it to other, similar plans with other providers. Otherwise, they may be opening themselves up to the liability that their plan isn’t in line with others like it should be—and that’s no good for anybody.
Hedge Your Bets with a Quick 401(k) Provider Review
The best way to make sure you’ve done your due diligence as part of your 401(k) fiduciary responsibility is to perform a quick provider review. This could be as simple as following these four steps:
• Ask for a Comprehensive Fees Breakdown: Your provider should be able to provide you with something called a 408(b)(2) disclosure, which will show you all the fees paid by you and your employees in your plan. Talk to your provider about how much you’re paying for your service, and who is receiving that money.
• Request Help with Benchmarking: Once you’ve set a baseline for what your plan’s fees and services look like, ask your provider to compare your plan to those of other, similar businesses. This process, called benchmarking, should look at your plan, the fees you pay, and the services you receive as stacked up against the rest of the industry. At my firm, we use third-party tools like fi360 and Fiduciary Benchmarks to offer unbiased insight into what other employers in the market are paying for similar plans and similar levels of service. We regularly evaluate additional vendors for this, as well, in order to ensure we are utilizing the most up-to-date tools and information.
• Speak with Your Friend or Family Member: With your plan’s benchmark results in hand, talk about what you find with your friend or family member serving your company’s plan. It may be difficult, but it’s important to address any discrepancies you may find between your plan’s fees and others out there in the market. Ask them to explain the fees you’re being charged, and also to explain the services you’re receiving. Keep the conversation as objective and rooted in the benchmark as possible so you can make it clear that you’re doing your due diligence as a 401(k) fiduciary, and just want to make sure you’re receiving the best service you can for your employees.
• Review Your Options: Finally, even though your current provider is someone you know personally, think about them as any other vendor you could hire for the job. How do their prices and services stack up with other service providers? Look into a few other options. You may be surprised to find that you could be getting better service or a lower price somewhere else. In that case, it might make the most sense for the good of the plan to make a change.
At the end of this review, you may determine that you are getting a good level of service for the price you’re paying and stay with your family member or friend—and that’s great! The key here is to not leave it to chance that you’ve hired the right 401(k) provider for your plan. Regardless of who your provider is today, it’s a best practice for a 401(k) fiduciary to perform this kind of check every few years and document that process. Fulfill your duty to make sure your 401(k) provider is the right person for the job, and I believe it’ll only mean good things for you, for your employees, and even for the friends and family you trust to help you with your business.
1 Based on a survey commissioned by Fisher Investments 401(k) Solutions in January, 2018.
2 Spark Institute 2016 Marketplace Update.
3 Based on a survey commissioned by Fisher Investments 401(k) Solutions in January, 2018.
4 Based on a survey commissioned by Fisher Investments 401(k) Solutions in January, 2018.