Using [a 401(k)] advisor for fiduciary guidance

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mycal75
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Using [a 401(k)] advisor for fiduciary guidance

Post by mycal75 »

Is there a benchmark fee that an advisor would charge to help a company administer their 401k plan? (From a fiduciary standpoint).

Background:

We have had the same 401k provider for years. Our 401k committee would meet once a year but does nothing in terms of looking at fees / availability of funds / taking our business to market, etc.

When a new HR manager came to our company, one of the first things they did was to shore up the fiduciary shortcomings of this company.

We contracted with a 401k advisor.

First year services included:
1-taking our plan to market
2-selecting finalist (new record keepers) in which to move monies. (3 finalists in addition to existing record keeper)
3-facilitation of conversion process
4-help in mapping existing funds to like funds with the new company.

For their yearly service, they provide
1- benchmarking / analytics of our funds. (Quarterly)
2-investment policy statement [404 (c)]
3-investment education support
4-bringing plan to market every three years
5-fudiciary plan review
6-provide fiduciary role under ERISA
7-fuduciary fitness program (meet fiduciary best practices)
8-newsletters
9-etc.

Looking to see if fees payable to the advisor would be attributable to scope of services provided, percentage of assets in the plan or any other matrix.

Thank you in advance for any comments.
livesoft
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

Fidelity does all these things. There is no need for an "advisor". Your 401(k) committee has a fiduciary responsiblity which the members cannot shirk nor offload to an advisor.

I'll say that what you have listed should cost at most $10,000 even from Fidelity.
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Rupert
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Re: Using an advisor for fudiciary guidance

Post by Rupert »

My small company retains an advisor for our 403(b) plan who provides almost exactly the same services you list with only a few exceptions. We hired him to conduct a fiduciary review of our plan a few years ago and liked him so much we kept him on to market our plan and then advise our plan committee on plan performance, needed changes to fund lineup, etc. We are a small plan with an open architecture-type platform (separate custodian, TPA, and advisor). The guy we hired is much much cheaper than any of the advisor services that the prospective TPAs were pedaling to us during the market process. He charges us well under $10,000 a year. My company pays him; he is not paid out of plan assets. I like very much the funds (almost all Vanguard index or DFA funds) he has recommended for the plan. If we were with a big company like Vanguard or Fidelity, I don't suppose we'd need him. But those guys weren't interested in running our plan because of its small size. They all insisted on a TPA, and all the TPAs were pushing some sort of advisor.
RetirementJoe
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Re: Using an advisor for fudiciary guidance

Post by RetirementJoe »

Just for full disclosure, I am a retirement plan advisor.

While the fiduciary guidance is important, any plan sponsor looking to hire
an advisor should expect much more than what was listed above. First off,
if you are paying an advisor for fiduciary services, it should be for full
delegation of the responsibility of selecting and monitoring the fund
options in the plan as a 3(38) fiduciary.

Second and more importantly, a retirement plan is not called an investment
plan, it's a RETIREMENT plan. An advisors job working with a plan should be
to enhance the retirement readiness of plan participants. This goes far
beyond selecting funds. It should include:

-Managing portfolios for the participants using the funds offered in the
plan (not target date or risk-based funds that a non-fiduciary provider is
responsible for managing. Due to the fact that the non-fiduciary fund
manager has no obligation to do what's in the participant's best interest
so they can use proprietary funds)

-Providing more than annual group education presentations that tend to get
poor attendance. The advisor should aggressively work with the plan sponsor
to get in front of participants in groups and one-on-one meetings to help
participants make the many important decisions well beyond portfolio
construction.

- Measure the impact of their services through retirement readiness
analysis

- Walk the plan sponsor through a prudent fiduciary process each year that
includes administration, deadline monitoring, and all aspects of the
sponsors responsibility to manage the plan.


I find that the industry has set the bar so low for what sponsors expect
from their advisors. We hope that plan sponsors will raise that bar by expecting
service to plan participants that impact their lives and add significant
value beyond the fees that are charged. Plan advisors number one focus in everything they do is to help participants achieve retirement success.

I apologize for the rant but it's a passion of mine!
Last edited by RetirementJoe on Wed Aug 20, 2014 7:52 am, edited 1 time in total.
livesoft
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

Rant is fine, but is there a benchmark fee you charge? :)
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RetirementJoe
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Re: Using an advisor for fudiciary guidance

Post by RetirementJoe »

The fee we charge is based upon a number of factors including number of employees, asset level, locations and expectations of frequency of participant interaction. Small investors have very few options for true independent advice. By leveraging the collective assets of the plan, participants have access to better advice and services at a much lower cost than most could get on their own. You are welcome to contact me directly at jgoldberg@bamadvisor.com if you would like more specific information. Our fees could range from 1% to 0.20%.
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Alskar
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Re: Using an advisor for fudiciary guidance

Post by Alskar »

Meisrow Financial (http://www.mesirowfinancial.com/fiduciary/sponsors.jsp) provides Section 3(21) Investment Advisory services for 3 bps and Section 3(38) Investment Management services for 6 bps. Is that what you're looking for?

FWIW, one can bundle these services into Vanguard small-business plan easily as Vanguard has an arrangement with Meisrow to provide these services. The Vanguard small-business plan rep said these are not popular options.

FWIW, we just went through this at my current employer. The lowest-cost adviser in those we reviewed wanted 50 bps of AuM to provide advisory services on our plan. Our plan has ~110 participants and ~$2M in assets. They were very vague about what their "Fiduciary Support" meant, but it appeared to me that they were offering ERISA Section 3(21) Investment Advisory service.
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mycal75
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Re: Using an advisor for fudiciary guidance

Post by mycal75 »

Thanks for all the comments so far.

@livesoft - does our money have to be with 'Fidelity' to use their service?

How much in assets would you consider a 'small business plan'?

While we are not paying fees directly (our ERISA/Admin budget) creates enough revenue to offset these fees. Some here do feel that the fees are a little excessive but seemed to have little choice at the outset to come into compliance quickly.

I think our expense ratios are a little high taking into account the amount of money that we received thru revenue sharing.

Wittle down advisor fees...cut back on the revenue sharing and give our employees better expense ratios...Is this the right train of thought?
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

mycal75 wrote:@livesoft - does our money have to be with 'Fidelity' to use their service?
I would guess so, but I do not know. Fidelity provides boilerplate stuff, so I imagine they spread the cost of the creation of that stuff across their billions of dollars of plan assets. For instance, they can create an IPS for you, but in reality I would guess they just take one off the shelf that they already have and change the company name. And why not, they should all be pretty much the same.

Despite what RetirementJoe wrote, most clients are quite happy with a low bar. Participants for the most part do not care and would not want to rock the boat anyways. Only when an enlightened and benevolent 401(k) committee member gets involved do things improve anyways.
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celia
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Re: Using an advisor for fudiciary guidance

Post by celia »

mycal75 wrote:First year services included:
1-taking our plan to market
2-selecting finalist (new record keepers) in which to move monies. (3 finalists in addition to existing record keeper)
3-facilitation of conversion process
4-help in mapping existing funds to like funds with the new company.
For my info, on #2, are there pre-determined criteria for making the selection? In other words, what's to prevent the winner from being rigged so that the whole "competition" was just for show?

On #4, why would you want to map existing funds to similar funds? What if the original choices were terrible? Do you want the replacement choices to also be terrible?
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livesoft
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

I think mapping is important for continuity. The mapping is something like large-cap US to large-cap US, interm-bond to interm-bond, balanced-to-balanced, etc. So its asset-class to asset-class. There is nothing nefarious or complicated about it.
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Alskar
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Re: Using an advisor for fudiciary guidance

Post by Alskar »

mycal75 wrote:Thanks for all the comments so far.

@livesoft - does our money have to be with 'Fidelity' to use their service?

How much in assets would you consider a 'small business plan'?

While we are not paying fees directly (our ERISA/Admin budget) creates enough revenue to offset these fees. Some here do feel that the fees are a little excessive but seemed to have little choice at the outset to come into compliance quickly.

I think our expense ratios are a little high taking into account the amount of money that we received thru revenue sharing.

Wittle down advisor fees...cut back on the revenue sharing and give our employees better expense ratios...Is this the right train of thought?
Vanguard considers anything less than $20M in assets to be a "small business plan". The vast majority of plans are less than $1M in assets.

With Employee Fiduciary is is quite easy to create a diverse fund lineup with a weighted average ER of <20 bps. I personally consider a plan with an average ER of >20 bps to be too expensive but the folks that sell these plans think 1% isn't too much.

Most of your questions can be answered by studying the Deloitte Annual 401k survey: http://www.deloitte.com/view/en_US/us/S ... 0aRCRD.htm and Vanguard's "How America Saves 2014" (https://institutional.vanguard.com/VGAp ... aSaves2014). Note that some of the services that advisers like to tout (like investment counseling or education) are not well utilized. The 2012 Deloitte survey says that 73% of sponsors report 10% or fewer of participants use financial counseling services. Why pay for something that hardly anybody uses?

More information on 401k plan costs can be found in the famous Curtis and Ayres paper: http://www.law.yale.edu/documents/pdf/c ... ees(1).pdf
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RetirementJoe
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Re: Using an advisor for fudiciary guidance

Post by RetirementJoe »

This comes back to my point about an advisor's role being more than about picking funds. Aside from what I mentioned before about managing portfolios to give participants, that don't understand asset allocation (probably not the readers of this site), ideal asset allocation portfolios, an advisors job is to facilitate an enrollment process that leads to smart choices for participants. Without that in place changing funds and providers by mapping like fund to like fund is not really resulting in any significant improvement.

Either doing a re-enrollment with a good education and guidance offering or defaulting everybody to a manged portfolio based on their age.

After all impacting the asset allocation of the majority of plan participants will make a much greater impact on future results than just changing the funds to better funds.

Participants need help establishing real goals, determining savings rates and building portfolios. Without the help and support of an advisor most plan participants are clueless.


If a plan advisor was a commodity you would want the cheapest one but they are clearly not. Even ERISA doesn't suggest you find the lowest cost, it says that costs must be reasonable for the value they provide. Giving participants the help they need is significant value.


On the recent comment about the survey showing participants don't use counseling services. The usage rates for online tools is even lower, but in my opinion this is where plan sponsors have let the bar stay to low. It should be an advisors job, and they should be measured by this, to make an impact on savings rate, diversification and discipline. Saying counseling sessions are available and showing up once a year is not enough. Advisors should be aggressively working to get in front of participats to impact their decisions. This is actually where smaller plans have an advantage. The survey you referenced mostly covers larger plans. It is more realistic for independant advisors to work with plans with under 1,000 participants than plans with 10,000 participants. So while I agree with the data in that survey, I don't think it is accurate in the smaller plans being services by independant advisors with dedicated resources to plans.
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

In recent years the law has been modified so that employees can be automatically enrolled (opt-out is manual; opt-in is default) and an aged-based target-retirement fund can be selected for them as the default investment. These two changes have certainly affected the plan that I was involved with in a very positive way. Furthermore, the 2 plans I was involved with made an employer contribution even if the employee made no contribution. That led to almost 100% participation.

With these ideas in place, I feel there is not much left for an external advisor to do. One issue was the folks who were in the plan before those changes. They often had some weird asset allocations.
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RetirementJoe
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Re: Using an advisor for fudiciary guidance

Post by RetirementJoe »

Those plan features are great and make an impact but most often the default savings rate is around 3% VERY few sponsors have combined the default with auto increase. So while you could get 100% over time, because former people aren't defaulted in, but they will be no where near a high enough savings rate. People unfortunately need to be told what to do.

On target date funds, they are great in concept but when everything is driven by age, there is a very real risk of a person taking more risk than their stomach can Handel or less risk then they need to take based on their savings rate.

A plan like you mentioned would be very low cost and better than most insurance platforms or active fund company platforms but having live support and proactive efforts to influence participants can make a huge impact.
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Re: Using an advisor for fudiciary guidance

Post by Alskar »

RetirementJoe wrote:On the recent comment about the survey showing participants don't use counseling services. The usage rates for online tools is even lower, but in my opinion this is where plan sponsors have let the bar stay to low. It should be an advisors job, and they should be measured by this, to make an impact on savings rate, diversification and discipline. Saying counseling sessions are available and showing up once a year is not enough. Advisors should be aggressively working to get in front of participats to impact their decisions. This is actually where smaller plans have an advantage. The survey you referenced mostly covers larger plans. It is more realistic for independant advisors to work with plans with under 1,000 participants than plans with 10,000 participants. So while I agree with the data in that survey, I don't think it is accurate in the smaller plans being services by independant advisors with dedicated resources to plans.
Page 67 of How America Saves 2014 (https://institutional.vanguard.com/VGAp ... aSaves2014) contains some data about financial counseling services. If I understand this data correctly, it says that only 3% of participants in all size plans actually use financial counseling services. This 3% utilization is consistent across all size plans from less than 1000 participants to more than 5000 participants. So the data do not suggest financial counseling is more utilized by participants in smaller plans.

In any case, what you're proposing is not beneficial to me. For the past 25+ years I have maxed out my 401k contributions and I have taken the time to educate myself about investing. According to the aggregate data provided during the annual benefit fair I am unusual in this regard. Over half of the eligible employees don't contribute a dime to their 401k plan. In this scenario I am being forced to pay the adviser a disproportionate amount (because of my larger savings rate and hence larger 401k balance) for a service that is not used. This is highly offensive to me for two reasons: It penalizes me for having the discipline to save and it rewards the adviser for providing a service that goes largely unused, both of which offend my Swedish sense of fair play.

In my experience (mostly in very small high-tech startups), it is highly unusual for the sponsor to pay for the adviser. Typically, the adviser is paid quarterly a percentage of AuM. It appears as a "maintenance fee" on my statements. If the employer is paying for the counseling services, that makes me feel a bit better, but it is still paying for unused services.

Here's an example: For the past 8 months or so the 401k committee at my current employer has being trying to get our employer to switch 401k plans from one administered by ADP to the Vanguard small business plan. I spent weeks of my own time putting together a presentation that showed how this plan was a win-win. It reduced cost and complexity for the sponsor while reducing costs and improving service for the participants. It seemed like a no-brainer to all of us on the committee except the HR manager. The HR manager insisted that we hire a financial adviser to provide guidance and to provide face-to-face financial counseling. The adviser wants 50 bps of plan assets for his services. If that cost burden is paid by the employees, then the new plan is about the same cost as the old plan. So far, the CEO is not willing to pay for these services. So after 8 months of work, we've essentially come to a stalemate. The status quo persists because of the insistence that any new plan including face-to-face counseling for all participants.

I am reminded of the adage about tomorrow's perfect plan being the enemy of a good enough plan today.
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

RetirementJoe wrote:[…]People unfortunately need to be told what to do.
[…]
So true. I've told this story before: I asked at a meeting, "How can we improve the 401(k) plan?"
One participant said, "I just wish the plan had index funds that we can invest in." I was dumbfounded because at the time the plan had had index funds for at least 2 years. Those funds were Fidelity Spartan Advantage index funds in 4 areas: S&P500, extended market, total international, and total US bond. The plan also had the Four-in-One fund of index funds.
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

@Alskar, our end-run around the face-to-face requirement was that participants could go to the local Fidelity office if they desired face-to-face counseling. I'm not saying the advice there would be Bogleheadish though.
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Re: Using an advisor for fudiciary guidance

Post by rob »

RetirementJoe wrote:<snip>Participants need help establishing real goals, determining savings rates and building portfolios. Without the help and support of an advisor most plan participants are clueless.
As are most so called advisors.... The issue to me is that this argument lets the wolves in the door even more than they are today - with no standards for advisors - despite what the industry wants us to believe with slick commercials on TV - most are salesmen and the conflict of interest is just staggering. In my view people are better off just throwing random money into their 401K funds than letting the bulk of advisors into their retirement plans - and I agree that is a sad view but I honestly believe that is the case since any "advisor" getting the job is likely giving someone something to get the contract.
RetirementJoe wrote:<snip>If a plan advisor was a commodity you would want the cheapest one but they are clearly not. Even ERISA doesn't suggest you find the lowest cost, it says that costs must be reasonable for the value they provide. Giving participants the help they need is significant value. <snip>
We just plain disagree as it's exactly a commodity - I want the cheapest investment options with the best execution and no "advisor" or "education" or any other things mascrading as sales leads within a captive audience. The value you see is just not there for me or IMO most people. What I really want is to NOT be locked into this employer driven retirement system when I don't have control of everything - have a look at the Australian super system for a good starting point.
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Re: Using an advisor for fudiciary guidance

Post by Alskar »

livesoft wrote:@Alskar, our end-run around the face-to-face requirement was that participants could go to the local Fidelity office if they desired face-to-face counseling. I'm not saying the advice there would be Bogleheadish though.
For reasons that are probably only clear to her, the Dir of HR did not engage with any of the usual suspects (TRowe Price, TD Ameritrade, Schwab, Fidelity, etc). Instead she brought in a who-who of insurance companies. Since we have 4 offices in widely diverse geographical locations it wasn't clear to me how the adviser who was near the US headquarters was going to provide face-to-face counseling to participants in the outlying offices.

If it would solve the current stalemate, I'd heartily endorse the selection of Fidelity or TD Ameritrade, but the Dir of HR seems opposed to 401k providers that aren't insurance companies.
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

That's too bad. Fidelity was a plus for us because our company has offices / workers in many different US states.

I don't see why the HR person cannot be "called out" on this. As in "Do your job."
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Re: Using an advisor for fudiciary guidance

Post by Alskar »

livesoft wrote:I don't see why the HR person cannot be "called out" on this. As in "Do your job."
I know, right? From what I can tell our Dir of HR was the prototype for Catbert, the evil HR character in Dilbert cartoons. She initially said that Fidelity didn't return her call. I am a Premium Services client at Fidelity so I used that leverage to have Fidelity give her a call on her cell phone and call me back to confirm they had called her. They called back several times to let me know they left messages. Even so, she still reports that Fidelity didn't return her call. Clearly she has some hidden agenda which is very disturbing.

I haven't figured out how to call her out without losing my job. She's a director and I'm a worker bee. I find it difficult to ride the fine line between confrontation and hostility. Just today I pointed out to her that the only bond fund in our lineup has a 3.75% front-end load and a 1.0% back-end load (PTTAX) which I think is criminal. She got pretty mad about that even though she did not put the current plan in place. What kind of crazy 401(k) plan has loaded funds? It's like the 1980's all over again!

The obvious solution to the face-to-face counseling issue would be to go with a TPA like Fidelity or TD Ameritrade with offices all over the country, but for some reason she is blocking them. I only got Vanguard into the mix by doing my own research that proved they were the lowest cost provider for our size plan. She was pushing a plan by John Hancock that had a 0.75% front-end load on all new money and any money rolled over from the current plan.
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

Her husband probably works for John Hancock or maybe her sister does.

In situations like this, I am usually not as direct as I am on an internet forum. I would take her to a nice lunch and discuss the following question "What would it take to get you to look at Fidelity, TD Ameritrade and others as a possible 401(k) plan provider?"
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Re: Using an advisor for fudiciary guidance

Post by Alskar »

livesoft wrote:Her husband probably works for John Hancock or maybe her sister does.

In situations like this, I am usually not as direct as I am on an internet forum. I would take her to a nice lunch and discuss the following question "What would it take to get you to look at Fidelity, TD Ameritrade and others as a possible 401(k) plan provider?"
I work in Vancouver, WA and she works in our Phoenix, AZ headquarters, so that might take some logistical work, but that could work! I guess there's a reason why I went into engineering...I'm not so good at this touchy-feeling stuff. Like most engineers I am data-driven. I kinda set the boze-bit on her when I caught her telling lies about Fidelity not returning her calls. I have little tolerance for dishonesty.

Next time I visit the mother-ship I will take her to lunch!
Last edited by Alskar on Tue Aug 26, 2014 11:51 am, edited 1 time in total.
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Re: Using an advisor for fudiciary guidance

Post by livesoft »

I would use frequent flyer miles and take a vacation day just to set up the lunch date. Let her pick the restaurant and tell her to make it special. That would probably really impress her about the seriousness of the lunch.

It worked for me when I had to talk to sscritic in person which was a very pleasant and memorable lunch indeed.
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Re: Using [a 401(k)] advisor for fiduciary guidance

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (fiduciary guidance). I also retitled the thread and fixed the spelling (was fudiciary).
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Re: Using [a 401(k)] advisor for fiduciary guidance

Post by fcirullo »

Good question, and great answers! I have included this thread in the wiki article Setting up a 401(k) plan. You can find it at http://www.bogleheads.org/wiki/Setting_up_a_401(k)_plan under Frequently asked questions.
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mycal75
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Re: Using [a 401(k)] advisor for fiduciary guidance

Post by mycal75 »

Thanks for all the great comments. Our advisor's contract is up for renewal in a few months. I think that we are paying way too much for their services. :oops: :moneybag I have given management a copy of this discussion so that they can best approach the renewal.
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Re: Using [a 401(k)] advisor for fiduciary guidance

Post by Alskar »

I neglected to include 401k Averages Book: 14th Edition (http://www.401ksource.com/) in my list of resources. This book costs $95 but is the most recognized source for 401k plan costs and features. If you're wanting to know the average cost for 401k features, this book is your best bet. I was able to get it through our local library's inter-library loan program. That is, I was too cheap to pay $95 for it. :D

Sorry for the oversight.
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