I’m still amazed at how often I come across participant-directed 401(k) plans that don’t have a financial advisor attached. Now, I completely get why solo 401(k) plans usually don’t. Most individuals think they can manage things themselves. I’m in that boat too—my solo 401(k) is self-directed, and I handle my own investments. But here’s the important point: the very moment I add an employee, I will hire a financial advisor. And the reason is pretty simple.
The Travel Agent Analogy
I’m often shocked that travel agents are still around in the internet age. Back in the day, unless you had access to their software, you couldn’t book airfare or hotels on your own. The internet changed all that. Now you can book trips with a click of a button. The same is true for investing. Thanks to technology, buying or selling securities has never been easier. Because of that, a lot of people think financial advisors are dinosaurs—like travel agents. But that comparison doesn’t hold water.
What Advisors Really Do
The real value of a financial advisor in a 401(k) plan isn’t about picking mutual funds. ERISA §404(c) requires a “broad range” of investment options, and, to borrow from Commander Montgomery Scott in Star Trek III, “a monkey and two trainees” could put together a mutual fund menu that checks that box.
The real role of a financial advisor is being part of the fiduciary process—helping draft an investment policy statement, regularly reviewing the fund lineup, and, most importantly, educating employees. That’s where the rubber meets the road.
A Real-Life Example
Years ago, I worked at a semi-prestigious law firm on Long Island (sorry, Lois) that had no financial advisor on its 401(k) plan. For ten years, nobody reviewed the investment options. I knew that was a problem the moment I overheard a staff member say he only invested in the mid-cap mutual funds because, in his words, “it represented the middle of the market.” That right there is why you need an advisor—someone to guide participants so their decisions aren’t based on misunderstandings.
Even Index Plans Need Help
Some plan sponsors think, “We only offer index funds or ETFs, so we don’t need an advisor.” Wrong. Yes, index funds generally outperform most active managers, but participants still need education around asset allocation, diversification, and risk tolerance. An all-index lineup doesn’t magically solve those issues. An advisor helps participants understand howto use those low-cost funds effectively, while also giving plan sponsors the ERISA §404(c) protection they want.
Why I’ll Hire One
When I eventually add employees to my firm, I’ll bring on a financial advisor—even though I’ve been knee-deep in 401(k) plans my entire career. Why? Because I know my lane. I don’t have the background or training to do fund analysis or conduct participant education at the level an advisor can. My value comes from my ERISA and fiduciary knowledge. I’ll stick to what I do best and hire an advisor to do what they do best. That way, I keep myself—and my plan—out of trouble.
In short: if you’re running a participant-directed 401(k) plan without an advisor, you’re gambling with fiduciary risk and your employees’ financial futures. That’s not a gamble worth taking.
