All Articles

401(k) Providers - Class 104

In our last class, we spoke about the roles and responsibilities of a broker. Today we're going to speak about advisors and how they differ from brokers. The two main differences between advisors and brokers are how they are compensated and their fiduciary commitment to your retirement plan.

Firstly, advisors are also known as fee-based advisors and R.I.A.’s (Registered Investment Advisors). While brokers are compensated by the fund companies in the form of commissions, advisors are paid a fee from either the plan’s assets or directly from the company sponsoring the retirement plan. If you attended last week’s class, you’ll remember that brokers can be limited in their recommendations as they will typically only endorse mutual funds that have a broker’s compensation included in the funds’ investment fees. In comparison, advisors are required to be unbiased in the investments they suggest for the plan and their compensation cannot be affected by the mutual funds they recommend.

The second difference between a broker and an advisor is their fiduciary commitment to the plan. Because an advisor serves as a fiduciary to the retirement plan, they have a legal obligation to their clients. Therefore, advisors have a greater incentive to run the retirement plan in the best interests of the participants and the plan sponsor. Brokers are not held to this same standard and do not share this level of fiduciary liability.  Now, you should know that there are two types of advisors to consider for your evaluation. Here’s a brief overview of a 3(21) advisor versus a 3(38) advisor.
A 3(21) advisor is a collaborative arrangement between the plan sponsor and the advisor. The role of the 3(21) advisor is to guide the plan sponsor through the fiduciary process. It is then the plan sponsor’s decision as to whether they will except or reject the 3(21) advisor’s recommendations. Under this arrangement, the plan sponsor maintains control over the management of the retirement plan but also retains the associated fiduciary liability of selecting the investment options that will be offered to the participants.
A 3(38) advisor has a slightly different role. The difference between a 3(21) advisor and a 3(38) advisor is discretion. One of the 3(38) advisor’s primary responsibilities is to select the investment options offered in the plan on behalf of the plan sponsor. Therefore, the plan sponsor would be outsourcing their responsibility of investment selection to the 3(38) advisor and would be reducing their fiduciary liability under this arrangement.
This concludes the segment on the providers you should consider when setting up a new retirement plan or evaluating an existing plan. Join us next week when we discuss how these plans are billed and how to uncover hidden fees…

This website uses cookies. By accepting the use of cookies, this message will close and you will receive the optimal website experience. For more information on our cookie policy, please visit our Privacy Policy.