Who Picks the Investments in Your 401(k)?

You don’t need to become an investment expert.  You don’t have to pay an outside advisor.

You do need to understand who is making the decisions and whether there’s a reasonable process behind them.

Most employers can tell me who their payroll company is.

Most know who their TPA or record keeper is, or at least who they call when something goes wrong.

Ask who the investment advisor is, though, and the answer is surprisingly often some version of:

“Who’s the what now?”

But somebody is responsible for selecting and monitoring the investments your employees can choose from.

You may have hired that person directly. Your recordkeeper may have bundled the service into the plan. Or your company may have retained that responsibility without really realizing it.

So before asking whether you need a 401(k) advisor, there’s a more basic question:

Who is already doing the job?

Somebody has to pick the funds

Your employees decide whether they want a target-date fund, an S&P 500 fund, or a bond fund.

Somebody else decided which target-date fund, which S&P 500 fund, and which bond fund would even be on the menu.

The Department of Labor is clear that plan fiduciaries are responsible for running a prudent process to select and monitor investments and service providers, and for keeping fees reasonable.

In most plans, that job lands in one of a few places:

• An investment advisor acting as a 3(21) fiduciary, making recommendations
• A 3(38) investment manager, who has discretion to select, monitor, and replace funds
• A fiduciary service bundled into the recordkeeping platform
• The company itself, because nobody outside the company accepted that responsibility

That last one is worth sitting with.

If nobody outside your company has formally accepted responsibility for the investment menu, you may be the one carrying it.

That’s not automatically a problem. Plenty of sophisticated employers run their own investment committees.

But if your reaction is, “Wait, I thought our 401(k) company handled that,” it’s time to find out who’s actually doing what.

What does a 401(k) advisor actually do?

At the simplest level, a 401(k) investment advisor helps decide which investments are available in the plan and whether they should stay there.

A 3(21) fiduciary generally makes recommendations, while the employer retains final decision-making authority.

A 3(38) investment manager generally has discretion to select, monitor, and replace investments on the plan’s behalf.

Either arrangement can work.

The important thing is knowing which one you have, who holds the responsibility, and how that person or firm is making decisions.

Bundled fiduciary services are everywhere

Plenty of large retirement-plan providers offer fiduciary investment services alongside recordkeeping, and there’s nothing inherently wrong with that.

Outsourcing the investment decision can be completely reasonable for a business owner who has no interest in evaluating mutual funds for a living.

But it’s worth understanding exactly what “outsourced” means — particularly when the retirement-plan provider also manufactures investment products.

Take Simply Retirement by Principal.

Wilshire Advisors serves as the named 3(38) fiduciary, and Principal offers several Wilshire-built investment lineups. Some of those lineups include Principal-managed investments, and Principal itself discloses that it can serve as investment manager for some of the options available through the program.

That doesn’t mean Wilshire made a bad decision.

It means the structure is worth understanding.

And the proprietary connection is not always obvious from the fund name.

A provider may tell you it doesn’t use proprietary mutual funds, and that may be technically true. But some target-date funds, collective investment trusts, and asset-allocation products can still include underlying investments or fixed-income components managed by the same financial organization providing other services to the plan.

Again, that doesn’t automatically make the investment bad.

It just means it can be worth looking one level deeper.

If a provider says, “We don’t use proprietary funds,” take a look at what the target-date series actually owns.

The broader question is still the same:

If an unaffiliated advisor reviewed this lineup from scratch, would they land on the same picks?

Maybe.

That’s the point of asking.

Proprietary investments aren’t automatically bad

A fund isn’t a bad investment just because the company providing your retirement plan also manages it.

And a proprietary lineup doesn’t mean nobody’s watching.

Funds can and do get replaced when they fail an investment-screening process, even when the available universe comes primarily from one investment company.

The more interesting question is whether the best option within that universe is competitive with what’s available everywhere else.

Those aren’t necessarily the same question.

An advisor screening twenty available funds might land on the best of those twenty — and that might also be the fund an independent advisor would choose from a much larger universe.

Or it might not.

Does it actually matter?

Sometimes.

Past-performance chasing is a bad investment process either way. A fund that lagged last year can lead next year, which is why replacing investments based on recent performance alone usually doesn’t make much sense.

Cost is different because the expense is known.

The SEC gives a useful example: $100,000 growing at 4% for twenty years reaches roughly $208,000 with a 0.25% annual fee, but only about $179,000 with a 1.00% fee.

Same return assumption.

Nearly $30,000 apart because of cost.

Scale that up to a retirement plan.

Assume $500,000 sits in one investment for ten years earning 7% before expenses. Compare an investment costing 0.25% annually with one costing 1.25%.

After ten years, the difference is roughly $86,000.

That’s on the original $500,000 alone, before counting additional contributions that might have compounded alongside it.

None of this means the cheapest fund automatically wins.

Active management may justify a higher cost. Different investment strategies take different risks. A higher-fee fund may outperform a lower-fee alternative.

But the math doesn’t care about the sales pitch.

A higher-cost investment has to overcome the additional expense before participants see any benefit from it.

That’s worth understanding before accepting the extra cost.

What should you ask about your 401(k) investments?

Start here:

• Who is our investment fiduciary?
• Are they acting as a 3(21) advisor or a 3(38) investment manager?
• Who actually has authority to replace an investment?
• What universe of investments are they choosing from?
• Are any of those investments affiliated with our recordkeeper or another service provider?
• What criteria are used to screen and monitor them?
• How often does the review happen?
• When was the last investment replaced, and why?
• Has anyone independent of the provider ever reviewed the lineup?

So — do you need an outside 401(k) advisor?

Maybe not.

If you can answer those questions with confidence, you may genuinely have what your plan needs already.

Your bundled fiduciary service may be excellent. Your investment lineup may be inexpensive, diversified, and well monitored. There’s no reason to add another advisor just so another person can send you a quarterly PDF.

But if you can’t answer those questions — or if the honest answer is, “I think we’re just… doing it ourselves” — that’s worth sorting out.

Because the bigger issue isn’t whether your plan has an advisor.

It’s whether anyone knows who is responsible for the investments in the first place.

If you’d like a second set of eyes on your plan, I’m happy to take a look.

No pitch. No sales deck.

I’ll tell you straight whether what you have looks fine or whether you’re carrying fiduciary responsibility you didn’t realize you had.

Schedule a 20-minute plan review

Other reviews:

Human Interest Vs. Vestwell

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