How the Industry Works

Here is a summary of just about every financial advisor’s focus:

1. Gather assets under management
2. Charge a percentage of assets under management
3. Pick mutual funds and/or stocks to help the client get the best return
4. Have clients fill out a risk tolerance questionnaire and have a conversation about their goals
5. Work primarily with individuals, and use a group retirement plan client to gather more separate
assets under management from plan participants and/or sell them life insurance and annuities while
also charging an assets under management fee for the retirement plan assets

Financial advisors who provide advice for group retirement plans have the same focus, but they additionally justify the assets under management charge by misleadingly touting the value of selecting the funds, acting as a fiduciary, and providing vendor search and benchmarking services.  In reality, these services do not provide value that is commensurate with the fees.  Think about it.  How can advisors claim it takes any more time to select funds or provide vendor search or benchmarking services for a $2 million plan than a $1 million plan?  If the scope of their services has nothing to do with the size of the account, then shouldn’t they charge the same fee regardless of the assets?

So what services should advisors focus on and how should they base their compensation?  I have never heard the answer expressed more clearly than Ted Benna, inventor of the 401(k), Founder and President of the 401(k) Association:

“The advisors are getting paid each time they go through the process with an employer to help pick funds as if they’re doing an original piece of work. There are more than half a million 401(k) plans, so that’s happened over half a million times. The fund menus aren’t that much different. But advisors are getting paid as if they’re doing an original piece of work. That’s just bizarre, extremely inefficient, and much too expensive.

First of all, they need to get away from asset-driven compensation and be paid a fee for service, the same as accountants or attorneys, who don’t get paid a percentage of corporate [client] assets. Their role should shift to helping people focus on how to succeed at retiring successfully, not on investment return. Building a smarter investment mix is pretty much of a commodity now. The focus should be on goals: “I want to retire successful. Help me do that.”

Instead of teaching clients small-cap, large-cap, value vs. growth and that stuff, help participants find ways to save more to do a better job of financial management and focus on the stream of income they’ll [need] for their retirement.”

I have modeled my practice precisely on what Ted Benna has suggested, and have elaborated on, the site I created to help plan sponsors make more informed decisions about selecting service providers:

“To address these issues and change the way the industry does business, I have focused my entire practice as an independent fiduciary and registered investment advisor on uncovering the excessive and unnecessary fees, lack of transparency, and conflicts of interest in the retirement plan industry since 2010.  I quickly became aware of these issues upon looking up the fees disclosed on plan sponsors’ 5500 forms and sharing this information with these same plan sponsors who consistently responded by saying they either did not know of any fees or knew there were fees, yet had no idea of the amount.  Consequently, I saw an opportunity to provide significant value to plan sponsors by simplifying the provider selection process and increasing transparency of fees and services, especially because of how destructive ongoing fees can be to retirement plan participants as the Department of Labor makes clear:

“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.” 

Given what I have learned about how the industry operates, I knew I had to find a way to shine light on it.  I hope this information will be helpful to people who want to secure their retirement savings.”


Paul D. Sippil, CPA