On March 4, the advisory team at Fiduciary Consulting Group @ PSA in Hunt Valley, Md., won the 2013 401(k) Advisor Leadership Award sponsored by NAPA and ASPPA. Jania Stout, Retirement Plans Practice Leader at PSA, received the award on behalf of the team during a session of the 12th annual NAPA/ASPPA 401(k) Summit in Las Vegas.
NAPA Net sat down with Stout to ask her about two aspects of her retirement planning business that set her apart: her integration of fiduciary duty into her business model, and her approach to setting fees.
Q: What makes your business model different?
STOUT: Our whole service model is built on the four pillars of fiduciary duty: the prudent man rule, the exclusive benefit rule, the diversification rule, and the plan document rule.
The pillar of prudence, according to ERISA, states that you must act as a prudent expert or seek help from one if you don’t have the expertise. Providers can be experts but they can’t give advice. What good is an expert who can’t give advice? A prudent expert is somebody who understands investments, monitors funds, and helps the committee make decisions about those funds.
We take a fiduciary position with our clients as a 3(21) advisor. We have the ability to be a 3(38) advisor, but if you hire us as a 3(38), we take on full discretion over the assets, which means that the committee gets disengaged and distanced from the retirement plan. My goal is to help them be more engaged with the participants so we prefer the 3(21).
The pillar of loyalty says that everything needs to be done for the benefit of the participant. What benefits a participant? Making sure fees are reasonable and giving them the proper education to help them save for a good retirement. We focus on education; we benchmark all our plans once a year through a third party; and we benchmark our own fees.
The pillar of diversify is the freebie ERISA gives plan sponsors. That says you have to have enough investment options to give participants the chance to diversify against large losses. It’s been years since I’ve seen a plan with fewer than three distinct investment options.
Finally, there’s the plan document rule — the compliance pillar — and this sets us apart. We used to be a TPA, which gives us a deep technical strength. We can do testing, design and documents. We also have our own plan document, approved by the IRS, if the client needs it. Plan sponsors spend more money in the area of compliance (or fixing compliance issues) than any other area. We help our clients stay on top of their document and operational compliance. We also keep track of all the required notices.
Our business model covers at all aspects of a plan fiduciary. Most plan sponsors think of fiduciary duty only in terms of investments but there’s so much more to being a fiduciary than just looking over the fund options. We look at the whole spectrum, those four pillars.
Q: How else do you serve plan participants?
STOUT: We give participants advice. To do that you have to be a registered investment advisor and you really have to sit down one-on-one with participants. That’s what we do. We don’t charge a fee for it, we don’t sell any product, so we don’t have any conflict issues with giving advice to participants.
I think most participants want advice rather than guidance. We spend a lot of time trying to educate about basic financial topics, and I think people really appreciate that. We keep it simple and help them take action. We don’t just give participants a to-do list. I want to walk away from any one-on-one meeting and know that I’ve taught them something, even if it’s only one thing. It takes time, and we’re never going to make them investment professionals, but in the end we can have an impact on plan health by being more hands-on.
In bear markets some people get afraid and put everything in cash, and advising against that is often a hard discussion. But in the end, the biggest impact on their not having enough money to retire isn’t how the market’s doing, it’s that they’re simply not saving enough. I’d rather they move toward cash if that where they feel more comfortable and it’s going to keep them investing consistently. If you force them into riskier investments and they see losses, they could pull out altogether.
We also put a big focus on helping participants understand the importance of having a budget and getting out of debt. A low balance in a 401(k) plan is only a symptom of a greater problem; if you’re swimming in debt you can’t even begin to think about getting to a 10% deferral. So we take a step back and focus on setting goals and eliminating their debt before we tackle raising the deferral percentage. We’ve helped participants pay off hundreds of thousands of dollars in debt. I’m convinced that if we start with simple goal setting, budget planning, and debt elimination, we’ll be one step closer to getting participants on track for a better retirement.
Q: How do you handle benchmarking of fees?
STOUT: At time of hire we calculate a flat fee based on a percentage of the assets. For a $10 million plan, for example, our fee would be 25 basis points, or $25,000. Most advisors who charge asset-based fees see their fees grow every year as the plan grows, with nobody having any say in it. But I felt that plan sponsors need to be more in control and we need to be more accountable for everything we’re doing.
So every two years, we produce a stewardship report for our clients. We show the client everything we’ve done over that time. We’ll track participation rates and fees, compliance and education.
Let’s say the fund grew by $2 million, which would be an additional $5,000 in compensation. And we’ve also helped participants pay off $200,000 in debt. We’d go to the plan sponsor with our report and ask that for the next two years we recalculate the fee based on new assets and come up with a new adjusted flat fee. We get that raise only if they decide we earned it and they approve the increase. That makes sure that we do our job to consistently and continuously improve the plan. And it’s transparent because we’re involving them in the decision. So far nobody’s said no, though they could. But if we didn’t do anything over two or three years to improve the plan, why should we deserve a raise?
Q: When you look at everything that’s going on in the industry today, how would you characterize the times we’re living in?
STOUT: There’s a shift happening in the industry, and I think it’s a good one. Brokers are becoming advisors and specialists are emerging everywhere. We have plenty of room for more educated advisors, advisors who’ll spend time with the plan sponsors and show them how they can make these plans healthier. In some cases the plan might need to reduce fees but sometimes it’s more about doing a better job for the same fee.
It drives me nuts to see all the negative press about the 401(k) industry, the articles about how high the fees are in these plans. But many of these are written by people who really don’t understand what’s going on. There are lots of great advisors and providers really trying to help participants get across the finish line. Stripping out all the fees would impede further advancement of tools for participants, and advisors won’t be able to spend the time doing one-on-one meetings.
Admittedly, there are plenty of plans out there that are paying or charging their participants too much. But the industry has started to wake up, particularly over the past five to 10 years. Even though that’s a good thing, we also need to be careful that we don’t shift too far in that direction and end up with providers who aren’t able to grow and innovate because they don’t have the resources to do it.
