Your 401(k) Consultant May Be Serving Two Masters

It's 2003, three years after the ignorant bliss of the bubble -- do you know what your 401(k) plan consultant is doing?

Unfortunately, many 401(k) participants don't know if their plan even has a consultant -- let alone what business relationships that consultant has with investment firms that could cause conflicts of interest. Also, most 401(k) participants have no idea how they pay these consultants. For instance, some consultants offer money managers the chance to join their institutes -- for as much as $50,000 -- and participants may end up footing the bill. And industry critics say this is nothing more than a scheme for funds to get on the consultant's recommended list for 401(k) clients.

Investors who have a hard enough time tracking their investments and finding ways to save for retirement may have little inclination to dig deeper into the actions of the consultant of their 401(k) plan. But given the paramount role the consultant plays in their retirement plan, individuals would be well-served to pay attention.

Increasingly, corporations that provide pension plans are scrutinizing the consulting industry and any relationships with money managers that may undermine consultants' advice, according to pension watchdogs.

Filling a Need

The use of consultants in 401(k) plans has soared over the past decade -- roughly half of all plans employ them, according to a study by research consultancy Greenwich Associates.

And they serve a crucial role of educating and advising sponsors on choosing the right mutual funds, building diversified portfolios and setting up a long-term investment strategy -- as well as assisting in hiring custodians, trustees, record-keepers and the other vital components of a sound retirement plan.

"Consultants provide a wonderful service to plan sponsors and fill a vital need in education and advice," said Russ Mason, president of the Investment Management Institute, which educates pension funds and consultants on how to manage their plans.

The essential need for a financial planner of sorts for company retirement plans -- since many employers were fearful of the legal implications of providing investment advice -- has fueled the rise in the 401(k) consulting industry, which includes a diverse array of players.