Uncovering Advisor Conflicts: Don’t Compromise the Effectiveness of Your Retirement Plan

By Brett Minnick, Senior Analyst, Innovest Portfolio Solutions, LLC

There has long been an implicit understanding that conflicts of interest for plan advisors can compromise the effectiveness of a retirement plan. Those advisors that have incentives that run counter to participants’ best interest rarely advertise or even disclose them, making conflicts of interest in retirement plans challenging to identify. Simultaneously, litigation aimed at retirement plan sponsors has increased as well. More important now than ever, plan sponsors must understand whether their retirement plan advisor is truly conflict free. We will discuss here some of the ways retirement plan sponsors can identify and steer clear of conflicted advisors.   

Parent companies engrained in providing other services

It is important to note that the retirement plan industry operates differently than it did 30, 20, or even ten years ago. As technology improves, so does the efficiency and scalability of both plan advisors and plan recordkeepers. This has resulted in a consolidation of the number of companies that offer these types of services. As the number of suppliers of advice and recordkeeping services decreases, the potential for conflicts of interest increases. Businesses get larger with affiliates and additional service offerings. 

One clear example of this is the growth of advisors that are affiliated as a branch of a larger investment/insurance firm. When the vendors pay an advisory firm a commission for one business line and these advisors are selecting the same vendors for their retirement plan sponsors, that is a conflict of interest. Consider an insurance company that offers property and casualty insurance as well as retirement plan services. If an advisor sells property and casualty insurance to some clients and earns a commission for that work while in another area of their business, they help clients find vendors for their retirement plans, the insurance companies that pay them are most likely at the top of their “recommended” list.  

Proprietary investment options

As a plan sponsor, it is imperative that you understand whether your advisor offers proprietary investment options. If so, your retirement plan advisor may have a conflict of interest when it comes to evaluating these products objectively. The associated fees for in-house investment recommendations can be a large source of revenue for them, often in addition to investment management advisory fees already being collected. The additional revenue is often difficult to assess or measure and is often not stated anywhere in their initial advisor agreement. These investment offerings are problematic because the advisor is hard pressed to be able to objectively evaluate and monitor these products.

Targeting IRA rollovers

Participants in retirement plans generally benefit from economies of scale related to the fees associated with the investments in their retirement account. When a participant transfers their retirement assets to an individual IRA, they are more likely going to be exposed to retail-like fees as opposed to lower institutional fees they previously benefited from with their retirement plan investments.

If your retirement plan advisor is actively soliciting IRA rollovers for private wealth management, the opportunity for enhanced advisory fees may compromise their ability to make objective recommendations. In most cases, profit margins are greater for firms that advise to individual accounts rather than those who advise to retirement plans. Because of this, advisors may be motivated to solicit participants with large account balances as private wealth management clients. Advisors can misrepresent whether it is best for a plan participant to remain in their employer-sponsored plan or move their assets upon departure from employment.

While this may at first seem only to be an issue for the individual participants who may face higher fees on the recommendation of a conflicted advisor, there is also a related effect on the plans they leave. Plans are often priced for recordkeeping services based on average account balances. If your high balance participants roll their assets out of the plan, your plan health and overall pricing can be negatively affected, diminishing the power of scale that plans offer to all involved.

Original salesperson conflicts

As a result of the SECURE Act, pooled employer plans (PEPs) are now authorized as a new type of retirement plan. PEPs allow unrelated employers to participate in a single plan, administered by a pooled plan provider (PPPs). Given the new nature of PEPs, there may be a motivation for those PPPs to also serve as the plan advisor. In doing so, these advisors may have a conflict of interest when it comes to plan design. In certain instances, it will not be in the best interest of the plan and plan participants to engage in a PEP, but if the advisor is also the PPP that sells the plan, they may stand to receive additional revenue from the change in plan structure.

Managed accounts

A managed account service can prove beneficial for some participants who are looking for their portfolio to be professionally managed and are comfortable exchanging an additional expense for that added benefit. In most cases, this additional cost to the participant only comes if they choose to utilize the service.

Recently, certain recordkeepers have created a platform in which retirement plan advisors can provide participant-level advice via managed accounts and be compensated for doing so. If an advisor is recommending to plan sponsors that they should utilize a managed account service and the advisor is being compensated for managed account usage, they stand to get paid twice. This is a clear and direct conflict of interest. On top of this, some retirement plan advisors are only allowing recordkeepers who can support managed account compensation when conducting a request for proposal (RFP). This may limit a plan sponsor’s choices when evaluating potential recordkeepers.

As you can see from the examples outlined above, uncovering advisor conflicts of interest can be challenging. Retirement plan players and their compensation structures are complex. As a fiduciary of your organization’s retirement plan, it is your responsibility to ensure you are making decisions that best serve the interests of plan participants and that you eliminate any conflicted advice. Take the time to carefully review your retirement plan and investigate any potential conflicts that could call into question your diligence as a plan sponsor.