Beware 401(k) robo-fiduciaries – especially the human ones

This article has been updated to reflect the correct name of the Mercer product mentioned in the second paragraph.

There’s a lot of talk about robo-advisers, many of which would be troubling to traditional 401(k) plan advisers if they had a viable business and distribution model. Retirement plan advisers should be more concerned about robo-fiduciaries, especially “human robos.”

Some institutional consultants have turned to the outsourced chief investment officer model, while others have moved down-market. Mercer created a product called Mercer Wise 401(k) that offers to serve as the plan administrator and named fiduciary for even the smallest 401(k) plan, promising reduced costs and better outcomes, which includes financial wellness.

But the chances for success are limited because 401(k) plans are sold, not bought. Few plan sponsors are likely to abandon a person for a phone number.

Of more concern are less experienced plan advisers armed with powerful tools and outsourced resources who look and act like more knowledgeable plan advisers but are willing to work for half the price. More experienced advisers will point to their resources and knowledge, but to unsophisticated buyers these emerging plan advisers, who have equipped themselves with investment analytics, automated record-keeper RFPs and fee benchmarking tools, look and feel like the real thing. And when they partner with well-known third parties like Morningstar that act as 3(21) or 3(38) investment fiduciaries, the offer seems compelling.

Ironically, experienced plan advisers have created the problem by helping to develop these co-fiduciary services readily available from providers for free as a value-add or from their broker-dealer, which purchases them in bulk for pennies on the dollar.

Record keepers who complain that advisers charge more than they do on a plan are exploring whether they want to act as a fiduciary –— even if it’s just for a point in time, such as when participants are about to roll over their 401(k) accounts. The fight for the participant is just beginning.

(More: 401(k) record-keeper consolidation is about to heat up)

Experienced plan advisers offer better plan design by leveraging auto features. How hard would it be for an emerging plan adviser or even a provider directly to offer the “ideal plan”?

Some record keepers and third-party administrators are offering 3(16) plan administrative fiduciary services, which relieves plan sponsors of many of their day-to-day functions — their largest concern. Some will add on 3(21) or 3(38) investment fiduciary services to displace the incumbent adviser at a fraction of the cost. Though open MEPs could be beneficial, they could also allow less experienced advisers to look and feel like the real deal.

What should experienced plan advisers do to combat the robo-fiduciaries? Embrace the trend.

Find ways to efficiently deliver the “triple F” services ( fees, funds and fiduciary) as well as plan design. Focus on services that less-experienced advisers cannot provide, such as acting as an outsourced chief retirement officer. And perhaps more importantly, advisers should measure the results of their services while focusing on the personal relationship. Otherwise they risk being displaced by robo-fiduciaries that look and seem to deliver the same services — for half the price.

(More: Lessons 401(k) advisers learned from the DOL fiduciary rule saga)

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ Retirement Plan Adviser newsletter.