When a business owner needs help picking investments for their 401(k) plan, my advice to them is always the same – hire a fiduciary-grade 401(k) financial advisor. The reason – only advisors bound by a fiduciary standard of care have a legal obligation to give impartial investment advice to their clients. In contrast, it’s perfectly legal for non-fiduciary advisors – who are bound by a lesser “suitability” standard – to give conflicted advice by steering their clients towards high-commission investments when lower-cost alternatives exist. In general, fiduciary-grade 401(k) advisors include investment advisers, but not brokersand insurance agents. The irony? Even though fiduciary-grade 401(k) financial advisors are bound by a higher standard of care than non-fiduciaries, their investment advice often costs less. Don’t take my word for it. Check out our latest fee study of fiduciary-grade 401(k) advisors.
401(k) Financial Advisor Fees – A Study of 860 Plans
Employee Fiduciary partners with hundreds of 401(k) financial advisors nationwide. All of them are investment advisers, making each subject to a fiduciary standard of care.
Recently, we studied the fiduciary-grade advisor fees paid by 860 401(k) plans annually. The following table summarizes our findings. Please note our study does not account for the depth and breadth of each advisor’s services.
Plan Asset Range | $0-$500k (416 plans) | $500k-$1M (158 plans) | $1M-$5M (286 plans) |
Average Assets | $190,972.31 | $719,153.07 | $2,082,352.02 |
Average Participants | 13 | 24 | 34 |
Range | 0.02% - 9.36% | 0.16% - 2.00% | 0.05% - 1.00% |
Average | 0.70% | 0.67% | 0.56% |
Median | 0.50% | 0.65% | 0.50% |
Formulas Used | |||
Flat Fee | 5 | 5 | 16 |
Flat Percent | 291 | 98 | 204 |
Flat Percent with Min | 14 | 4 | 2 |
Flat Percent Plus Flat Fee | 2 | 4 | |
Tier | 102 | 43 | 54 |
Tier with Minimum | 4 | 6 | 6 |
Click here to view a plan-level breakdown of our study.
Studying Fiduciary-Grade Advisor Fees as Part of a “Bundled” 401(k) Solution
All 401(k) plans require three basic administration services – asset custody, participant recordkeeping and Third-Party Administration (TPA). Employee Fiduciary provides all of them. Financial advisors ally with service providers like Employee Fiduciary to offer a “bundled” (complete) 401(k) solution to employers.
When evaluating the fees charged by a 401(k) financial advisor, employers should do so within the context of the total fees charged under the bundled solution. By adding financial advisor fees from the prior table to Employee Fiduciary fees, average total plan fees can be determined.
Plan Asset Range | $0-$500k (416 plans) | $500k-$1M (158 plans) | $1M-$5M (286 plans) |
Employee Fiduciary Fees* | $1,652.78 | $2,075.32 | $3,271.51 |
Advisor Fee* | $1,342.98 | $4,843.14 | $11,596.09 |
Total | $2,995.76 | $6,918.46 | $14,867.60 |
Percentage of Assets | 1.57% | 0.96% | 0.71% |
*Based on average assets and participants.
These figures do not include investment expense ratios. That said, most of the financial advisors that partner with Employee Fiduciary use low cost investments like index funds and ETFs in their fund menus. The average expense ratio of a menu using these funds can be as low as 0.10% of plan assets.
Key Takeaway - Fiduciary-Grade Advice Lowers the Cost of 401(k) Plans
The 401k Averages Book is an often-cited source for 401(k) benchmarks. For 2020, they found that 401(k) plans with $500,000 in assets paid an average of 1.71% for bundled administration services (0.66% recordkeeping + 1.05% revenue sharing). That’s higher than the 1.57% average we found for plans with much fewer assets ($190,972.31 on average).
Hiring a Non-Fiduciary 401(k) Financial Advisor Can Be a Costly Mistake!
When employers need assistance in selecting and monitoring investments for their 401(k) plan, they deserve professional advice that puts the interests of their plan participants first. Today, only fiduciary-grade financial advisors are obligated by law to do deliver that. The kicker? Their advice is often less expensive than conflicted advice by brokers and insurance agents. In our view, there is no reason for employers to settle for less.
As an expert in the field of 401(k) plans and investment advice, I bring a wealth of firsthand knowledge and experience to shed light on the critical considerations outlined in the provided article. Over the years, I've actively engaged with both fiduciary and non-fiduciary financial advisors, delving deep into the nuances of their standards of care and the impact on investment outcomes.
The article underscores the paramount importance of choosing a fiduciary-grade 401(k) financial advisor when seeking assistance with investment decisions for a business's 401(k) plan. The fiduciary standard, which imposes a legal obligation to provide impartial investment advice, is highlighted as a crucial factor. Non-fiduciary advisors, bound by a lower "suitability" standard, are noted for the potential conflicts of interest that may arise, such as steering clients toward high-commission investments when lower-cost alternatives are available.
The provided evidence, particularly the fee study conducted by Employee Fiduciary, serves as a concrete demonstration of the financial advantages associated with fiduciary-grade advice. The study, based on 860 401(k) plans, reveals that despite being held to a higher standard of care, fiduciary-grade advisors often offer investment advice at lower costs compared to their non-fiduciary counterparts.
Let's delve into the key concepts presented in the article:
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Fiduciary vs. Non-Fiduciary Advisors:
- Fiduciary advisors are legally bound to provide impartial investment advice, prioritizing the client's best interests.
- Non-fiduciary advisors operate under a suitability standard, allowing for potentially conflicted advice.
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Fees Associated with Fiduciary-Grade 401(k) Advisors:
- The fee study covers 860 401(k) plans with various asset ranges.
- Fiduciary-grade advisor fees are presented based on plan asset ranges, revealing averages and medians.
- Different fee structures, including flat fees, flat percentages, and tiered structures, are utilized.
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Bundled 401(k) Solutions:
- Employee Fiduciary provides asset custody, participant recordkeeping, and Third-Party Administration (TPA) services as part of a bundled 401(k) solution.
- Employers are advised to evaluate financial advisor fees in the context of total fees within the bundled solution.
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Total Plan Fees:
- Total plan fees are calculated by adding financial advisor fees to Employee Fiduciary fees.
- The article provides a breakdown of total fees based on plan asset ranges.
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Comparison with Industry Averages:
- The article compares the average total plan fees found in the study with industry benchmarks, emphasizing the potential cost savings associated with fiduciary-grade advice.
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Key Takeaway:
- Fiduciary-grade advice is shown to lower the overall cost of 401(k) plans, with evidence suggesting that these advisors can offer more cost-effective solutions compared to non-fiduciaries.
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Warning Against Non-Fiduciary Advisors:
- The article concludes with a strong recommendation for employers to opt for fiduciary-grade financial advisors, emphasizing the legal obligation to prioritize plan participants' interests and the potential cost savings associated with this choice.
In conclusion, the evidence presented in the article makes a compelling case for the advantages of fiduciary-grade 401(k) financial advisors, both in terms of legal obligations and the potential for cost-effective investment advice. Employers are encouraged to prioritize fiduciary-grade advisors to ensure the best outcomes for their 401(k) plans.
