I am honored to have been invited to participate in a panel discussion at the NAPA 401(k) Summit next month. Since the pandemic, I’ve had plenty of opportunities to deliver webinars from the comfort of my desk, but with the delivery to a crowded room I haven’t had many reps since 2020. The topic is related to the evolution of default investments and target date funds in the retirement plan marketplace. A real yawner for all but the nerdiest of retirement plan nerds.
The audience will be a mix of peers, other retirement plan consultants and firms, providers, recordkeepers, and asset managers dedicated to the industry. In preparation for the topic, I’ve had the chance to review where the industry seems to be pushing plan sponsors towards, and it’s troubling. During my research, in paper after paper and webinar after webinar, it was clear advisors were advocating for Adviser Managed Accounts (see our position here) or custom asset allocation models and collective investment trusts managed by the organizations charged with assisting the plan sponsor in executing on their fiduciary responsibilities.
At no time has the line become so blurred between consultant and provider in our industry’s history. As a retirement plan sponsor, it's important to be aware of the potential risks that can come from a retirement plan consultant manufacturing their own investment products. While it may seem like a convenient and cost-effective solution to use in-house investment options, several drawbacks and potential legal issues can arise from this practice.
Here are some of the key risks associated with retirement plan consultants manufacturing their own investment products:
- Conflict of Interest: When a retirement plan consultant creates their own investment products, it creates a conflict of interest. The consultant may be incentivized to promote their own products over others that may be more suitable for the plan participants. This can lead to biased investment recommendations and the related risks.
- Fiduciary Responsibility: Retirement plan sponsors have a fiduciary responsibility to act in the best interest of plan participants. If a consultant is manufacturing their own investment products, it can be difficult to demonstrate that these products were chosen solely for the benefit of plan participants and not for the benefit of the consultant or their firm.
- Legal Liability: If a retirement plan consultant manufactures their own investment products and those products underperform or fail, the plan sponsor may be held liable for any losses incurred by plan participants. This can lead to costly lawsuits and damage to the sponsor's reputation.
- Lack of Oversight: When a retirement plan consultant manufactures their own investment products, there may be a lack of oversight and transparency in the investment process. This can lead to potential conflicts of interest and unethical practices that may not be identified until it's too late.
To avoid these risks, retirement plan sponsors should carefully evaluate any investment products offered by their consultants and ensure they are chosen solely for the benefit of plan participants. It's also important to regularly review the performance of investment options and make changes as necessary to ensure that participants have access to a diverse range of high-quality investment options.
While it may seem like a convenient solution to use proprietary investment options from your trusted advisor, the potential risks associated with retirement plan consultants manufacturing their own investment products nearly always outweigh the benefits. Plan sponsors should prioritize transparency, fiduciary responsibility, and commitment to providing plan participants the best possible investment options.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.