A long-time family friend and newly hired CFO asked me to look at her company's 401k plan. The $10 million plan has not had an investment review in years from what she can see in the 401k files (and possibly has not been reviewed since the plan was set up). There is no evidence of fiduciary training. Employee education (in order to meet 404c compliance/ Code 2F on Form 5500) consists solely of whatever the record keeper and Third Party Administrator include with participant statements (statement stuffers). The plan has no advisor and no Investment Committee.
One might think this opportunity would be a good fit. I have a long personal relationship with the CFO. Several areas are lacking in the plan and the C-Suite leadership recognizes this. I reviewed the plan, benchmarked my fees at the lower end of the advisory range, and sent off my proposal. I waited. And waited. And waited some more.
I never seek to be the lowest fee advisor in the 401k space. "Dive to the bottom" is a fruitless endeavor that can result in an advisor effectively working pro-bono for easily a hundred hours a year. I finally got tired of waiting and followed-up with my friend. Followed-up the following month as well. And one more time for good measure. It seems the C-Suite does not want to pay for an advisor's services but does want those services for free. How does that strike you as a sustainable business model?
I did have a brilliant idea while out walking my dog. Some of my best thinking seems to be while walking my dog or when I am in the shower. Something about the peace and quiet/ lack of interruptions, I suppose? Anyhoo, I asked for the ticker symbols of the investments to see if the investments might have any hidden fees (ie, 12b-1's) that could be used to pay for my services without creating hard-dollar costs to the company. Nope! The investments are free of 12b-1 fees.
I noticed something though while reviewing the plan's investments. The plan is using retail/ off-the-street share class investments instead of the more appropriate institutional or R-6 share class versions of the investments. A quick spreadsheet showed that the plan is overpaying for the investments. This is something a 401k advisor would easily have seen/ pointed out/ implemented the switch to the lower-fee version of the same funds.
I've messaged my friend, the CFO, and pointed out that she can save plan participants 25% in investment fees through a simple investment switch. Not only will it save her plan money but it is the prudent thing to do from a fiduciary point of view. The Prudent Person Rule. The Duty of Loyalty. These all come into play here. These points would also have been covered in fiduciary training.
The plan has saved money by not hiring me. But this opportunity also made me think of the old adage, you can bring a horse to water but you cannot make the horse drink. The plan appears adamant against spending money for services they need. Nothing I can say or do will change their mind. Even an annual fee of $1 is $1 more than they spent the prior year on advisor services.
What is logical to one is illogical to another. Someone who is convinced that passive investing is the Holy Grail will not be convinced otherwise by an active investor advocate armed to the teeth with charts and graphs. Ditto to someone who does not believe in green investing. Alpha-evidence coupled with pictures of polar bears and lush agricultural landscapes will fall on blind eyes and deaf ears.
Sometimes the best thing you can do is to provide value and then walk away from an opportunity.