LarryStein

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As a business owner and a 401(k) Plan Sponsor, you have a responsibility to select a high quality investment adviser for your plan. Unfortunately, many business owners are too busy running their businesses and concerned about other benefit plans to pay as much attention as they should to their retirement plans.

And yet, for many business owners and employees, their 401(k) plans will be a key driver of their wealth and enjoyment during their retirement years. Therefore, I thought it would be a good idea to offer these five questions you should ask your 401(k) adviser to make sure you’re getting the value you deserve:

1. What is the cost of the funds in our portfolio?

This may seem like a simple question with a simple answer: The expense ratio of the funds you select. But things are not always what they seem in the 401(k) business. Your mutual funds may include a sales charge, either on the front-end, back-end, a deferred sales charge or a redemption fee. In addition, your mutual funds may charge a 12b-1 fee, which is an ongoing commission paid to brokers. So many possible fees, so many ways to line the pockets of your advisers.

For that reason, I strongly suggest you fill your 401(k) portfolio with low-cost index funds. They generally don’t have additional charges or 12b-1 fees, and cost much less than actively managed funds. You should be able to build a portfolio of index funds for an average cost of about 0.20% compared with roughly 1.00% for actively managed funds. That 0.80% savings per year could make a huge difference in your 401(k) balance over the long term.

2. What are the total fees you receive from our plan?

For some advisers, this is another easy question: It’s simply their advisory fee, which should range from about 0.25% to 0.75% for a small business plan. For many other advisers, it’s a loaded question. As noted above, they may receive a 12b-1 fee, which could shift 0.25% or more every year from your account balance to the adviser’s pocket. Other types of investment vehicles, such as variable annuities and collective investment funds, may charge additional fees as well.

Bundled plans, which include the full bundle of services from investing to plan management, are sometimes filled with fees that are not always readily apparent. Some of these fees will go to your financial adviser, some will go to the insurance company or mutual fund; all of it will reduce your retirement account balance. Read your plan’s Fee Disclosure statement, it may surprise you.

Ideally, I believe you should have a top-notch adviser manage your investments, a local third-party administrator customize the plan to meet your objectives, and a major brokerage firm handle the trading, record keeping and technology. Get the best talent you can; don’t settle for a bundled package just because it’s being sold by a buddy.

3. Do you function as a plan fiduciary so you can offer advice?

Many 401(k) plan advisers are not able to give investment advice, but probably not for a reason you expect. Generally, these advisers work for insurance companies or mutual funds, and will sell you a bundled plan. They may tell you they cannot advise you on which funds to pick (they may even tell you it would be against the law to do so). Essentially, you’re paying a ton of fees and getting no advice — not a good value proposition.

The truth is that to provide investment advice, an adviser must function as a fiduciary. Fiduciaries take on a much higher level of responsibility, and most advisers (or their firms) are unwilling to accept the potential liability. It’s logical that to function as a fiduciary an adviser should probably have a higher level of expertise, which some may not have. Of course, that should be the adviser’s problem, not yours.

Instead, choose a top professional who will function as a fiduciary and serve as a partner with you on the plan. A fiduciary will offer advice on investments, help you build a team of retirement plan experts, and consult with you on a wide range of issues. Get an expert, someone you can trust; not your neighbor or fraternity brother.

4. If the stock market seems vulnerable, what will you do to help us reduce risk?

Twice in the previous decade, both in 2000-2002 and 2007-2009, we saw the impact of bear markets on 401(k) accounts. During both declines, stocks were down more than 50% at one point. Chances are, many 401(k) investors watched helplessly as their account balances melted down to levels they previously thought unimaginable.

Of course, no one can consistently predict market tops and protect you against all declines. But a first-rate investment adviser may at least be able to recognize some periods of excessive risk. If the adviser is willing to function as a fiduciary, they may suggest that you reduce your risk a bit during periods of increased vulnerability. Will they be right? Certainly not all the time; perhaps only on a rare occasion. But maybe the one or two times the adviser is correct could be enough to save your account balance from major devastation, and that could be the difference in the lifestyle you enjoy during your retirement years.

5. What are your plans to educate our employees and increase plan participation?

Some business owners tell me that the last time they saw their 401(k) adviser was when the plan was sold to them. Don’t let that happen to you. Your company’s 401(k) plan is too important to you and your employees.

To maximize the plan’s benefit, your adviser should be committed to educating your employees. This will help you garner high levels of employee participation and help them gain the full advantage of the 401(k) benefit. The 401(k) laws were constructed to encourage all employees, not just the business owners, to benefit from the plan. If participation is low, you and your highly compensated employees may be limited in the benefits you enjoy. You may even have to refund part or all your contributions in certain years — that can really hurt morale and even impact the hiring of top talent.

As you can see, it’s good business to have your employees participate in the plan and see the benefits of their investments. If your employees enjoy the full benefits of your 401(k) plan, you will, too.