Why Your 401k Adviser May Be Underpaid

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I have had the opportunity to speak to several business owners since the news broke that Anthem 401k was being sued for “Vanguard being too expensive.” I’m not going to touch the nuances of the case that are missed in this statement. Rather, I want plan fiduciaries to dive deeper into who is getting paid for work on their plan and what real value those professionals add. The knee jerk reaction of many has been that if Vanguard isn’t cheap enough, “Who else is leaching off my plan and how do we stop it?” For years, the retirement plan business has seen costs fall precipitously, partially due to competitive pressures. But it is also due to realized efficiencies through technological advancements. However, I think we’ve hit a point where many 401k advisers may be underpaid. The following is a quick list of several reasons that your 401k adviser may be worth more than you are paying him:

  1. They have to know all of the things that a standard financial advisor knows…in addition to everything retirement plan related. To be skilled with retirement plans, it is imperative to be proficient in all aspects of financial services and planning. In servicing a plan, invariably participants ask questions about all kinds of things. Retirement plans involve tax benefits, investment allocation, time value of money, determination of personal risk tolerance, and implementation of solutions to meet investment goals. Oh, and that all has to happen within an ever expanding framework of laws. The Pension Protection Act of 2006, for example, gave us an additional 900 pages of laws to govern how retirement plans work.
  1. They commit to improving themselves to better serve you. The popular Certified Retirement Plan Specialist (CRPS) designation requires 16 hours of continuing education every two years. For perspective, that is almost as much CE as is required by the state of New York for CPAs and is in addition to standard CE requirements for investment licensing. The Accredited Investment Fiduciary (AIF®) requires an additional six hours of CE every year for those who also hold that designation. Both have a Code of Ethics that requires them to act in a professional manner with a higher bar than may otherwise be required. This is additional training that most brokers won’t bother undertaking. Many advisers will engage training through the American Society of Pension Professionals and Actuaries (ASPPA), all of which is retirement plan specific. It helps your adviser better understand the mechanics of the plan (testing, plan design, etc.) which in turn helps him better serve your plans needs. Many 401k advisers also have the CFP or ChFC designations that you may see in traditional wealth management advisers. Their continued investment in themselves provides direct benefits to you.
  1. They have a serious time commitment.
    1. Illustration of a million dollar plan. Let’s break out the commitment on a million dollar plan where the advisor is making .50% (50bps). While higher than what we typically see in the market, it gives us round numbers which I like for examples. That works out to roughly $5,000/year. According various sources, financial advisors make between $150-400/hour. Let’s use $250/hour as a rough average. On your $1 million plan, you are paying for roughly 20 hours over the course of the year ($5,000 divided by $250/hour). Let’s break out that time. If your adviser is doing quarterly fund analysis and enrollment meetings, those activities normally take an hour each with an hour prep time each. With just those two pieces, you have exhausted 16 of the allotted 20 hours, not including any follow up work. That leaves a scant 20 minutes per month for the advisor to answer questions about loans, hardship distributions, asset allocation, current economic trends, Roth vs. Traditional, beneficiary designations, fee disclosures, summary plan descriptions, distributions, Social Security…you get the idea.
      1. Let’s throw in another wrinkle. The adviser doesn’t get 100 cents of that dollar he is paid. Part of it goes to his firm, rent, office supplies, office expenses, professional designations and dues, and technology to help deliver a better service to you. And that is all before taxes.
    2. Other projects. Some plan sponsors utilize their advisor for other events related to the plan. This can include RFPs (to determine if your plan is getting a “good deal”) or preparing for a government audit. Each of these have the potential to tie up hundreds of hours, some of which may fall directly on the shoulders of your advisor.
    3. Time that goes into a vendor switch. If you switch your third party administrator or recordkeeper – really any vendor – the adviser will invariably have extra time tied up in learning the new process employed by that vendor such as who to call when, preferred contact methods and times of the day, proper form submission. All of these facets take time to learn and understand. And they all represent a time commitment.
  1. They will have a fiduciary liability. The Department of Labor has a current proposal that would hold your 401k advisor to a fiduciary standard. Currently, many retirement plan advisors are held to a suitability standard. That means that they are only required to show you a product that meets your needs. However, the advisor or his firm could derive more benefit from the sale of the product than you derive from owning it. The DOL posits that advisors should be held to a standard where the advice they render is in the best interest of the client, before that of themselves or their firm (this is a very simplified version). Under the proposed laws, your advisor has an increased legal liability for serving as your adviser. Of note, some advisers already voluntarily act under a fiduciary standard. This higher standard, in addition to its benefits to you, also carries higher professional liability insurance and stricter compliance procedures, both of which have to be paid for somehow.

If you don’t believe that your adviser is doing all of this work behind the scenes, use our service for a year; contact me for information (jbaltes@qpsteno.com). I guarantee that you will be dumbfounded by everything that is going on that you didn’t realize. Our services can give you the same insight on your recordkeeper and third party administrator as well. This list is not meant to be all-encompassing. Rather, it is meant to give you a peek inside the tent of what it takes to be a retirement plan adviser and why yours may be worth more than you are currently paying him.

11 thoughts on “Why Your 401k Adviser May Be Underpaid

  1. David Arey, CLU, ChFC, FLMI, CEBS

    You’ve convinced me: 401(k) plans are manifestly too complex and far too expensive to be effective vehicles for financially illiterate Americans (which is most of them) to accumulate sufficient assets to provide them with meaningful lifetime incomes. 401(k) plans came into being quite by accident so the reality that they are an abject failure should surprise no one. Assume your hypothetical $1 million plan has a dozen participants. How much one-on-one time does each one of them get for their 50 bbps? Does the participant with a $50,000 account balance get 5 times more investment advice and services than the participant with a $10,000 account balance? Of course not.

    • I agree with you that 401k plans can be complicated. And sometimes regulations and financial products make them more complicated than they need to be. Further, I agree that most Americans could use a little more financial literacy than they currently have. However, it seems to be a bit farfetched to call 401k plans an abject failure. Plenty of Americans have the ability to retire comfortably due to their workplace defined contribution plan.

      How do you propose we improve the retirement system?

      • David Arey

        Jon – “Abject failure” was admittedly a hyperbolic phrase. Sorry about that.

        Because they are voluntary in nature (by employers to sponsor (and maintain) and by employees to participate in or not (and at what percentage of salary (and figure out at what level and pre tax and/or Roth)) and because they are almost always “employee directed” with regard to how to allocate assets, and because even “plenty of Americans” may have accumulated large nest eggs but they may not be as fortunate during the decumulation phase, many, many improvements are needed.

        I think it’s fairly hopeless – sort of like asking how to improve my golf swing (and chipping and putting) so I can shoot rounds in the 70s (versus rounds in the 90s (or 100s).

        Nevertheless, here are a couple ideas for your consideration:

        (1) as part of the “qualified plan’ requirements (along with eligibility, vesting, etc) amend the IRC so that all 401(k) (and 403(b)) plans must include auto enrollment (at 6%) and auto escalation (to 12%);

        (2) have the DoL establish “principle-based” rules fiduciaries could follow when picking investments that essentially provide safe harbor investments. One principle would be along the lines that total asset based fees on a “DOL approved” investment couldn’t exceed say 75 basis points (so a Target Date Fund with total asset based fees of 50 would be a safe harbor investment — a plan could still use a TDF with total asset based fees of 1.90%–at its our peril;

        3) provide a $100 to $250 income tax credit (i.e. an incentive) that is added to the rollover amount when vested account balances at termination of employment are rolled to an IRA (instead of cashed out);

        (4) DoL provide and then mandate the use of a one-page template for 404(a)(5) fee disclosure (instead of what for me last time was 15 or so pages);

        (5) require plan sponsors disclose to participants on at least an annual basis normative “benchmarks retirement asset accumulation amounts” by age (e.g. 0.5x salary by age 30; 1x by age 35; 4x by age 50; 6x by age 60 and 8x by age 67) to give individuals a realistic idea what they actually need to accumulate to retire; and

        (6) let participants “buy into” Social Security retirement benefits (say $100,000 at age 70 increases the monthly retirement benefit from SS by $750) with a portion of their 401(k) or 403(b) assets which would be on an “actuarial fair” basis.

        It would be helpful for employers who want to “sponsor” a qualified retirement plan be required to actually fund it (like DB plans and “money purchase pension plans”). But 401(k) plans are profit sharing plans. If 401(k) plans were “money purchase pension plans” with required funding by plan sponsors (and allowed for employee deferrals), that would be a worthwhile (but widely unpopular with employers) improvement.

        With virtually all of the risks solely on the shoulders of employees (the vast majority of whom are financially illiterate), it seems to me that 401(k) plans are simply not designed to provide retirement income. Of course, 401(k) plans were never ever designed to do that.

        • David- no problem on the hyperbole. I thought it might be the case; but it is tough to tell in writing alone. There are those out there who firmly believe that it is a lost cause. On the other hand, I prefer to look for ways to improve the system. You gave me a number of points that I have never considered. Being very analytical, give me a little time to work through them. I *really* like point #5. The only trouble there is the transient nature of the current work force. However, #3 could also help address that.

          And 404(a)(5) notices need to be completely redone- and 408(b)(2) while we are at it. WHile living up to the letter of the law, many are not in the spirit of it.

          Thank you for your engagement.

  2. David Arey


    Two other thoughts to chew on:

    (1) Plan sponsors should conduct a “know your participant” campaign at least every other year (like investment firms do with their customers via the “know your customer” letters) to make sure the investments their participants have continue to remain “suitable” for their circumstance. This would be a good time to remind employees about “benchmark” asset accumulations targets by age.

    (2) The federal government has been “asleep at the switch” since ERISA when it comes to legislating a coherent national retirement income policy. Because 401(k) plans are “lacking” in many ways, several states (e.g. IL and CA) have passed laws so that citizens who aren’t covered/participating in an employer sponsored retirement plan will be “auto-enrolled” in a state sponsored IRA. I shudder to think about 50 different auto-IRA programs. What a mess that would be.

    Far better (if the goal is to provide access to retirement savings for those working without a company plan) would be to have a national auto-IRA program.

    Employers would only perform payroll function of sending in money. Administration would be by a quasi-government corporation (sort of like the PBGC is legally).

    Just four investment options (a) I-Bonds; (b) a total stock market index, (c) a total bond market index, and (d) a balanced index fund (60/40 stock/bond). The default investment would be the balanced income fund until age 59 1/2, then it would be I-bonds (see below).

    There would be a $25 annual account fee and a 10 basis point admin fee on the first $50,000 in the account and a 5 basis point fee on the next $50,000 in the account. Employers could provide matching contributions (but wouldn’t be required to do so.

    To “tilt” the benefits/advantages toward low and middle income workers (which is a problem with the current 401 (k) market (which despite ADP/ACP favors higher income individuals)), the match would be on a payroll to payroll basis (so no profit sharing after the fact and figuring out who is still employed and eligible to receive it) and matches would be capped at $1,000 a week of earnings. So an employer could match 50 cent on a dollar but only on the first $1,000 of weekly salary.

    Employer match would be immediately 100% vested AND all employer money plus interest and gains be required to fund a life annuity starting not early than age 59 1/2 or no later than age 70 1/2 (and available before 59 1/2 only at death or disability) — so all employer funds plus interest/gains would actually have to be ANNUITIZED.

    Only Roth employee deferrals would be allowed. Individuals would have access to their contributions for any reason at any time (essentially a “universal savings account”) BUT all interest and growth on contributions would have to be annuitized just like employer match money. Since contributions are after tax, individuals have tax-free (and penalty free access. Simple to administer.

    No loans or hardships (which are costly to administer). If an individual wants his/her Roth deferral for any reason, they can have it. But they are going to have to die or become disabled to get interest and growth on their deferrals and any employer money–and all of those funds MUST BE ANNUITIZED.

    Finally, at age 50 all interest/growth on employee deferrals and all employer money (match plus interest/growth) would by auto-default, be invested in I-bonds. If an individual didn’t want that to happen, they’d have to “opt out”.

    • Dave- Like you, the thought of 50 different state run IRAs makes me ill. It sounds like the debacle that we are seeing in the 529 market (advisors selling 529 plans of other states because “what you will lose in state benefits will be more than made up by the superior investments”). But I am not sure that a federally run program offers a better solution.

      The myRA program looks good on the surface, but it loses its shine pretty quick once you take closer look. By being tied to bonds specifically, a myRA account is going to struggle to keep up with inflation, let alone provide any long term growth potential. Participants in these programs need three things (IMHO): opportunity to participate; ease of participation; and opportunity for growth. Your suggestion adds the opportunity for some equity options to round out what is missing from myRA.

      The proposition of depositing employer dollars into a lifetime annuity is an interesting concept. In this scenario, you avoid the potential fiduciary pitfalls and logistical issues that a plan sponsor might face if this was implemented in the 401(k) world. Leakage is an issue that the Government Accountability Office has been investigating for years. One of the issues that they initially identified as the issue of inappropriate drawdown strategies. Your solution would curb some of those problems.

      However, the proposal is not without its drawbacks.

      Which insurance company is going to sponsor the annuity? Do they have the funding to prop up the risk based capital that would presumably result from implementation? Or does the annuity get Federal backing, and thus not require any of the normal regulatory requirements? Is there a potential problem in having two government agencies that have conflicting interests (Medicare keeping you alive and this annuity program benefiting from a shorter life-span)? Like the notion of 50 different state run IRAs, I think the concept of state run (or federal, for that matter) plans that are exempt from ERISA is horribly misguided. Federal programs are not known for their efficiency.

  3. David Arey

    Jon – I favor the use tontines rather than life insurance backed annuities to provide lifetime income. Michael Kitces did a very nice “book report” on Moshe Milvesky’s book “King Richard’s Tontine” here:


    A national auto-IRA could be designed so that essentially the investments were “employer-directed” (that is pre-determined by the design of the plan). To me, very few individuals have the skill set to be prudent investors yet virtually all 401(k) – 403(b) plans are employee-directed. Off the top of my head, I offered a 60/40 balanced index approach that would at some age automatically move to I-bonds as a possible “employer-directed” allocation for a national auto IRA. I’m sure that could be improved upon.

    Employer-directed plans worked pretty well before 401(k) plans arrived on the scene. I think a national auto IRA plan that defaulted to a consensus asset allocation but allowed for individuals to opt-out and do something else (within a low cost and narrow range) would be WAY BETTER than the over priced, conflicted advice environment that exists for many 401(k) participants today.

    • Dave- You had to throw this blog post at me, didn’t you? I’m joking. I have read this article several times and it spins the wheels in my head every time. I agree that there is a concern that annuities are too expensive and thus, scare off investors for whom they are appropriate. The article was silent on the cost of 50 state registration and other factors that lead to the inflated cost structure.

      I am intrigued by the notion of a tontine. It would seem to solve several of the problems that we face in helping working Americans transition from an accumulation portfolio to a retirement portfolio. But I can’t get out of my head how much it reminds me of playing poker in my buddy’s basement. For the two guys in the final round, their stacks of chips are pretty big. But what about the first guy out who got a series of bad hands (read as “usually me”)? Is his initial investment just feeder for the remaining players? I would love to actually speak with someone familiar with this subject to get a better handle on it.

      I enjoy Kitces and his work. He is thoughtful, thorough, and generally unbiased in his assessments, which is why I found it curious that he did not touch on the tax aspects of the tontine vs. an annuity. While the annuity does provide the mortality credit beginning with the initial payment, that mortality portion is considered a refund of principal and, therefore, tax free. The piece did not discuss the tax implications of the mortality portion of the tontine. Is the mortality portion considered a return of principal once it starts? Or it is more like the gambling analogy where it is a portion of someone else’s portion of the pie?

      As for employer directed plans, I agree that there is merit to bringing their attributes back as a bigger push. I think we are starting to see the pendulum swing back towards more traditional DB style plans. Cash balance plans are continually gaining traction. Conversations around QLAC style options are at least a move in the right direction. I have an acquaintance in Wisconsin who runs a block of 401k plans that are all balance forward, employer directed accounts. He explicitly sold them as such for many of the reasons that we have discussed.

  4. David Arey

    I’ve done some reading and research about tontines over the past year or so, but I’m in no way an expert. The way I’m thinking about using tontines for retirement planning today is how Alexander Hamilton proposed doing in 1790 to pay off the debt from the Revolutionary War.

    Tontines, in Europe before Hamilton made his proposal (that wasn’t adopted), were a method Kings used to raise money to fight wars. My understanding is they largely predated “government bonds”. Milevsky’s book gets really deep into the historical details which is interesting enough I suppose but to me it was a bit much.

    Today with SPIAs, an insurance company has to estimate mortality, reserve for it, pay sales commissions, figure out overhead and a profit, and hope that things work out. Even if the actuaries guess exactly right, I’d say it’s still not a great deal for the annuitants because of the sales costs, expenses, and profits that were “covered” in the pricing. And if the actuaries were really wrong (think Genworth and LTC policies), the insurance company will need to be bailed out. Guarantees are expensive…

    With tontines, my understanding is that the King (or the government) essentially paid “investors” a given amount of interest split among survivors. So, if 10 people each invested $10,000 and were promised 4% return…the bucket of money would be 10X$10,000 or $100,000; 4% on that would be $4,000 and while all 10 were alive, they’d each get $400 a year.

    Now…one of them dies. That person is “out” (just like someone with a life annuity).

    The government is still on the hook for $4,000 to service the $100,000 it received. But the nine survivors would split the $4,000 and their payout would jump to $444.44. When the next person dies, the $4,000 would be split among 8 survivors so each would get $500.

    This would continue until there were two survivors and each would get $2,000 (half of the $4,000). They had “invested” $10,000 and now, 40 years later, they were each getting $2,000 annually. When it’s down to one survivor, she would get the entire $4,000 annually until she dies, on her $10,000 investment.

    When tontines were based on the lives of 5-year old girls, there was a problem (as the King could be paying out money for 95 years.

    Fast forward to tontines for retirement today.

    Assume the U.S. government would be willing to pay a tontine 3% interest for 40 years. Assume 10 retirees each invest $100,000 each. Assume the subscribers to the tontine are all 65 years old and they are all males. The “interest” is 3% on $1,000,000 or $30,000 and for 10 subscribers, each gets $3,000.

    Twenty-five years on, after five have died, the surviving five split $30,000 so each gets $6,000. Admittedly, not “tied to inflation” but, survivors get more money.

    Hamilton capped the mortality credit by freezing the payments once there were just 20% (here 2) survivors. Two survivors who invested $100,000 receiving $15,000 on income annually is pretty good. Maybe it’s good enough for three survivors to receive $10,000 each?

    Details. By freezing the amount survivors get, I think a reserve can be built up so that there are funds available to pay money to the person who lives to be 120 years old…even thought the Feds only paid 40 years of interest.

    I think a reasonable “incentive” to solve the “annuity puzzle” would be to “annuitize” the employer money (and gains and interest thereon) in tontines that “wipe out” federal debt and have the proceeds paid to surviving subscribers be TAX-FREE (perhaps on say the first $50,000 of tontine income so that this “benefit” is taken advantage of by high-income individuals).

    With a $17 or $18 trillion debt, if even one trillion dollars of retirement tontine money was generated, that would be a step in the right direct. Rather than using a tontine to fund a war, the US could use them to pay down the debt.

    I’d advocate for letting individuals roll money from 401(k)s and IRAs (Traditional stuff that is taxable) into USA for Retirement (Universal Savings Accounts for Retirement) so more money is there sooner to jump start tontines.

    • Dave- I understand the mechanics as explained in your example. As I think about it, several questions immediately spring to mind.

      Part of the potential downside of an annuity is the potential threat of dying immediately after annuitization. I know- there are riders and other ways to protect the policy holder, but let;s use basic scenarios for the discussion. If I annuitize tomorrow and die at the end of next month, my account is gone. Is that also the case for a tontine? Statistically it is unlikely. But I would be incredibly wary of putting my money in an product that could essentially expire worthless if I die early.

      How are the taxes handled? Applying the same logic as we see in the annuity world, one would think that the entire payment is taxable as it is essentially an interest payment initially and someone else’s interest payment later. Part of the benefit of an annuity is that only part of the payment is taxable.

      At the end, you seem to hint at this being a replacement for social security. Did I misinterpret that?

      Unless I am missing something else, these scenarios require contributions or a lump sum deposit. The 401k system still needs to work on getting more people engaged as there are two phases of the process: accumulation and decumulation.

      I have a different solution white boarded in my office. Annuities fill a specific need…but at a cost. Leaving retirees to their own devices poses certain risks; bankruptcy rates in populations who suddenly come into money is absurdly high. Our conversation has caused me to lose several hours challenging my assumptions for that solution. This decumulation conundrum needs to be tackled soon as thousands of Americans are retiring daily without enough good options.

  5. David Arey

    Jon –

    From an income tax point of view, distributions after age 59 ½ (so we aren’t getting into the 10% penalty tax etc., etc.) from a traditional IRA (i.e. pre-tax)) and from a 401(k) plan (from pre-tax employee deferral and employer contributions) are taxable as ordinary income when received. So when these dollars are used to purchase an immediate annuity, the monthly annuity payments, as they are received, are taxable as ordinary income.

    And “qualified” (after age 59 ½ and the account is at least five year old) distributions from Roth IRAs and Roth 401(k) accounts are income tax free. And so when those dollars are used to buy an immediate annuity, those annuity payments are income tax free as they are received.

    I think Kitces didn’t bother to address the taxation of tontine payments because should the money come to buy the tontine from “qualified” money, the taxation is known: Traditional = taxable; Roth = tax-free.

    However, when non-qualified assets are used to buy immediate annuities then yeah, part of each annuity payment is essentially a non-taxable “return of basis”. I suspect that the same would be true with tontine payments but I’m pretty sure tontines are not included in say Internal Revenue Code 72 where annuity taxation is found. So that would be an open question.

    I don’t think it’s rationale to buy a “life only” SPIA (single premium immediate annuity) with money from an IRA, or a 401(k) plan, or with non-qualified assets. There is a HUGE downside to buying a life-only SPIA.

    That’s why most everyone who buys an SPIA also “buys” some sort of guarantee (and I’m not talking about riders) but rather in the form of either a “joint life” (e.g. spouse) or a period certain (e.g. 10 year certain) annuity payout.

    With a joint and survivor annuity, monthly payments are made as long as either annuitant is alive. With a “life and 10-year certain” should the annuitant die before 120 monthly annuity payments are made, annuity payments continue for 120 months…if the annuitant dies 121 months after issue, no annuity payment is due. So, with a life and 10-year certain, if the annuitant dies 6 years in (after 72 monthly payments) a named beneficiary will receive 48 monthly payments.

    From The Annuity Shopper, a 65-year old male buying a SPIA with $100,000 premium, the average from the dozen of so companies they represent a life only annuity pays $545 a month. BUT a life and ten year certain SPIA pays $531 a month and a life.

    While pure tontines don’t have “refund” or “life and period certain” payout options, they would be very easy to “price”. The “annuity puzzle” (that people don’t buy SPIAs despite needing to insure against longevity risk) is not so much the “I’m going to die a month into the payout period (so, buy a life and 10-year certain) but rather the reality that they’ve lost control of the $100,000.

    A “national auto-IRA” would not in any way replace Social Security. Social Security is compulsory…essentially everyone is “covered” whether they want to be or not. It has several significant problems, but they’re solvable (assuming political leadership (which is not, come to think of it, a reasonable assumption)).

    A national auto-IRA would be an alternative to the 401(k) marketplace (where only about half the full-time employees are covered by a plan at any point in time).

    A “national” auto-IRA plan would be (to me) FAR better than having 50 different state auto-IRA plans. That would be crazy.

    The 401(k) “system” is riddled with problems (in my opinion) some of which we’ve touched on here. One immediate “fix” that is a no-brainer to me would be to REQUIRE (in the IRC) that to be qualified, a 401(k) plan MUST include an auto-enroll provision with a deferral percentage of at least 6 percent AND an auto-escalation provision up to 12 percent. The Pension Protection Act “permitted” these provisions; it’s time to require them in all 401(k) plans because they work to get people to save.

    Given the median 401(k)-IRA account balances for the 60-65 year old cohort is something like $110,000, the “decumulation problem” is largely hypothetical at this point for most Americans. If I’m 65 or 66 or 67 and I’m taking Social Security and all have in my retirement account is a couple hundred grand, I’m likely in pretty deep trouble. I don’t think there is a lack of good “payout” options; for most (i.e. over half the baby boomers) the problem is not nearly enough money in their retirement accounts.

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