What Does a Retirement Plan Consultant Do? And How Should You Pay One?

If your company sponsors a 401(k) or 403(b) plan, the people who make decisions about it are fiduciaries under ERISA. That means they are personally responsible for choosing and monitoring the plan’s service providers and investment options, and making sure the fees paid from participants’ accounts are reasonable. Most HR and finance teams have full-time jobs unrelated to the retirement plan, and few have deep investment or retirement plan expertise.

A retirement plan consultant is an independent outside expert who helps them do it well. This article explains what a good consultant does, the different ways consultants get paid, why independence matters more than the job title, and the questions to ask before you hire one.

What a retirement plan consultant does

Virtually every plan relies on several service providers: a recordkeeper, an investment advisor, an auditor, and sometimes a third-party administrator (TPA) and a 3(16) administrative fiduciary. The employer is responsible for monitoring all of them. A retirement plan consultant works for the employer to do that monitoring more efficiently and effectively. The core work usually includes:

• Selecting and monitoring service providers. Reviewing the performance of the service providers, making sure the plan is not paying unreasonable fees, and replacing providers when it makes sense.
• Benchmarking fees. Monitoring what the plan pays for recordkeeping, administration and investment advice against what the market will actually charge a plan of the same size and needs.
• Running competitive bids. Requests for information (RFIs) and formal requests for proposal (RFPs) that put providers in competition for the plan’s business.
• Negotiating. Using that competition to get better pricing and service terms, then making sure the final contract matches what was promised.
• Investment oversight. Either helping the committee monitor the investment lineup or helping it hire a 3(38) investment manager that takes on that responsibility.
• Committee support. Attending plan committee meetings, providing fiduciary education, and documenting each decision and the reasons behind it.
• Plan design and compliance. Reviewing nondiscrimination testing, Form 5500 filings and fee disclosures, and helping fix plan problems.
• Conversions. Managing the move when the plan changes recordkeepers, so participants and payroll aren’t disrupted.

Some employers hire a consultant for a single project, such as a fee benchmark or an RFP. Others hire one on an ongoing basis to oversee every provider on the plan’s behalf.

Consultant, advisor, broker: what’s the difference?

Not much, as far as the job title goes. “Retirement plan consultant,” “401(k) advisor” and “plan advisor” are used loosely across the industry, and none of them tells you what you’re actually getting. Three things do:

1. Fiduciary status. Will the consultant agree, in writing, to act as a fiduciary to your plan? A 3(21) advisor shares responsibility for investment recommendations, but the committee makes the final call. A 3(38) investment manager takes over investment selection and monitoring. Other retirement plan consultants take fiduciary responsibility for selecting and monitoring the plan’s service providers. Some advisors and brokers are not plan fiduciaries at all.
2. How they are paid. This drives behavior more than any title (see the next section).
3. What else they sell. A consultant whose firm also sells investment funds, wealth management, rollover IRAs or insurance to your employees has interests that may conflict with your participants’ interests.

How retirement plan consultants are paid

Consultant pay usually comes in one of five forms, and many firms combine several:

• A percentage of plan assets. For example, a set number of basis points a year. The fee rises every time the plan’s assets grow, whether or not the work has changed.
• Commissions or revenue sharing. Paid through the plan’s investment funds (for example, 12b-1 fees). These are easy to miss because they never appear on an invoice. See fee leveling and revenue sharing.
• A flat annual fee for ongoing services.
• A project fee or hourly rate for one-time work such as a benchmark, an RFP or a plan conversion.
• Indirect income from your employees. Some consultants earn revenue by rolling participants’ savings into IRAs, managing their personal wealth, or selling managed accounts or proprietary funds. This income often never appears in the plan’s fee disclosures.

None of these is automatically wrong. What matters is that you make sure the total compensation is reasonable for the work performed and that you know every source of it. A flat fee tied to a defined scope of work is the easiest to evaluate. An asset-based fee deserves a hard look: if the plan’s assets double, does the consultant do twice as much work?

Why independence matters

Much of a consultant’s value comes from negotiating with recordkeepers and investment providers on your behalf. That works best if the consultant has nothing to gain from any particular outcome.

Many firms in the retirement plan industry also manage money, sell rollover and wealth services, or have business relationships with the recordkeepers they recommend. Those conflicts can be subtle. A consultant may simply be less inclined to negotiate hard with a recordkeeper that sends it referrals, or less inclined to point out revenue earned when participants roll their savings out of the plan.

Recordkeepers increasingly make money beyond the base recordkeeping fee, from managed accounts, IRA rollovers, brokerage windows and proprietary investments. An independent consultant helps you see the total economic relationship between your plan, your employees and the provider, not just the line item on the invoice.

Good process is not enough on its own

A lot of so-called “fiduciary” advice focuses on documenting a standard process: compare your fees to an industry average, write it down, and move on. That falls well short of what fiduciaries owe their participants. Documentation matters, but it isn’t the goal. The goal is a plan that pays only reasonable fees, for services selected solely in the best interest of participants, and that is administered solely in their interest.

For example, comparing your fees to a published average tells you whether you are typical, not whether you are paying a reasonable price. Competitive bidding regularly produces fees well below average, because providers are pricing to win the business. (Why average isn’t reasonable.) A good consultant focuses on acting solely in the best interest of participants and preventing harm to them. Done well, that also protects the plan’s fiduciaries.

10 questions to ask before you hire a 401(k) consultant

1. Will you act as a fiduciary to our plan, and will you put that in writing? As a 3(21) advisor, a 3(38) investment manager, or something else?
2. How are you paid, in total and from every source, including anything paid by recordkeepers or fund companies?
3. Is your fee a flat amount or a percentage of assets? What happens to your fee when our plan’s assets grow?
4. Does your firm sell investments, rollover IRAs, wealth management, managed accounts or insurance to plan participants?
5. Do you receive anything from the recordkeepers you recommend, such as referral payments, marketing support or conference sponsorships?
6. How do you decide whether a fee is reasonable? (Be wary if the answer is only “it’s close to the average.”)
7. When did you last run a formal RFP for a plan like ours, and what changed as a result?
8. How do you deal with revenue sharing and make sure participants are in the lowest-cost share class available?
9. Will you take responsibility for selecting and monitoring all of our plan’s service providers, or only advise on investments?
10. What will we have in writing after each decision, explaining what we decided and why?

When should an employer bring in a consultant?

Common triggers include:

• It has been three years or more since the plan’s fees were tested in the market.
• The plan has grown significantly, so providers should be reducing the fees they charge.
• The company plans to go through a merger, an acquisition or a change of payroll provider.
• Employees or committee members are unhappy with the recordkeeper’s service.
• The committee has changed, or members aren’t sure what their fiduciary duties require.
• The company has read about excessive-fee lawsuits and wants to understand what they mean for its own plan.