The Value of Working with an Independent Investment Consulting Firm

As a plan sponsor offering a 401(k) plan to employees, employers have a fiduciary duty to manage the plan in the best interest of employees. This responsibility includes ensuring that the investment options available to participants are not only competitive but also truly aligned with their financial well-being.  

The challenge for many employers, however, is distinguishing between investment consultants who offer truly independent advice and those who may have conflicts of interest due to affiliations with certain investment products or financial institutions. This is where working with an independent investment consulting firm becomes essential.  

Unlike consultants tied to mutual fund companies or investment firms, independent consultants operate without conflicts of interest, providing unbiased recommendations that serve the best interests of both employers and employees. By doing so, they help plan sponsors meet their fiduciary obligations while ensuring that employees have access to high-quality investment options.

Why Independence Matters in Investment Consulting

Many investment consultants have affiliations with mutual fund companies, brokerage firms, or financial institutions that offer proprietary investment products. These consultants may receive commissions, revenue-sharing fees, or other financial incentives for recommending specific funds or investment vehicles, which can lead to biased advice. This presents a clear conflict of interest—one that may not always be obvious to plan sponsors.

For example, some major recordeeping providers also provide advice on what investments plan sponsors offer to their participants. If they are incentivized to include their own proprietary investment products within a 401(k) plan, their recommendations are inherently conflicted. They may prioritize their firm’s profitability over the best interests of the plan sponsor and its employees, putting fiduciary responsibilities at risk.

An independent investment consultant eliminates this conflict of interest entirely. Because we do not offer proprietary investment products or receive compensation from fund companies, we have the freedom to analyze the entire mutual fund universe objectively. Our sole focus is identifying the best-performing, cost-effective investments that align with the plan’s goals and employees’ needs.

How an Independent Investment Consultant Selects Investments

Selecting the right investments for a 401(k) plan requires more than just scanning performance charts or choosing well-known funds. A disciplined, data-driven process is necessary to ensure that employees have access to investments that provide long-term growth potential while maintaining appropriate risk levels.

At LoVasco, our investment selection process follows a rigorous multi-step approach:

1. Defining Asset Classes

The first step in constructing a well-balanced 401(k) plan is determining which asset classes should be included. This involves:

• Benchmarking against industry best practices – We analyze what top-performing plans in similar industries offer.

• Evaluating participant demographics – Different employee groups may have different investment needs based on factors such as income levels, investment experience, and retirement timelines.

• Considering diversification principles – A strong 401(k) lineup should provide participants with options across various asset classes, including equities, fixed-income, and alternative investments.

2. Conducting Quantitative Screening

Once we determine the asset classes that should be included, we conduct a quantitative screen of the mutual fund universe. For each asset class, we analyze thousands of funds and evaluate them based on:

• Trailing returns – How the fund has performed over multiple timeframes.

• Peer group ranking – How the fund compares to similar funds within its category.

• Risk-adjusted returns – We use metrics such as alpha and Sharpe ratio to assess whether a fund provides a good balance of risk and reward.

• Standard deviation – This helps us measure the volatility of a fund and whether it aligns with the plan’s risk tolerance.

Funds that do not meet our minimum quantitative criteria are eliminated, significantly narrowing the field of potential investment options. At this point, we have narrowed our selected funds down to 100 or so.

3. Applying In-Depth Financial Modeling

After our initial screening, the remaining funds are subjected to additional financial modeling. This step involves:

• Evaluating consistency in returns over different market cycles.

• Assessing downside protection measures in volatile markets.

• Confirm expense ratios are “reasonable”.

At this stage, we typically narrow our list down to about 20 funds per asset class.

4. Conducting Qualitative Assessments

Numbers alone do not tell the full story. The next step in our process involves analyzing qualitative factors, such as:

• Investment philosophy – Does the fund manager have a clear, disciplined strategy?

• Manager track record – How experienced is the fund management team?

• Portfolio strategy and conviction – Does the manager consistently adhere to their stated investment style, or do they frequently shift strategies?

By understanding the philosophy and approach behind each fund, we ensure that the investments we recommend align with the long-term objectives of your retirement plan.

5. Final Selection & Ongoing Monitoring

The final step in our process is selecting the top five or six funds per asset class, which we call our Focus List. These funds are then reviewed by our internal team, where we stress test our recommendations through in-depth discussions and debate.

Our investment selection process does not end once the funds are chosen. We refresh our Focus List every quarter to ensure that we are consistently offering the best investments available. If a fund no longer meets our standards, we have a list of pre-vetted replacements ready to go.

Five Critical Questions Every Employer Should Ask of their Retirement Plan Consultant

If you are currently working with an investment consultant or evaluating the quality of your retirement plan, consider asking these key questions:

1. Is your consultant an independent fiduciary?

An investment consultant who is not fully independent may have financial incentives that create conflicts of interest. Independent fiduciaries are legally required to act in the best interest of the plan and its participants. Firms are obligated to a standard of transparency here, so if you ask, they are obligated to answer truthfully.

2. Do you have an Investment Policy Statement (IPS)?

An IPS is a formal document that outlines how your 401(k) plan’s investments are selected, monitored, and replaced when necessary. If your plan does not have one, you may not be meeting your fiduciary obligations, and you may want to consider other options.

3. Does your plan include proprietary investment options?

If your plan includes funds managed by your recordkeeper or your consultant’s firm, this could be a red flag to the Department of Labor and/or ERISA. Proprietary funds can create conflicts of interest, as they may be selected to generate additional revenue rather than to provide the best performance for employees.

4. Has your consultant reviewed their process for independent investment selection with you?

The investment selection process is critical, and it should be well understood by the plan sponsor. Ask your consultant to review this process in detail so you can be sure you are getting the best possible guidance for both the employer and employees.

5. Are your employees able to schedule one-on-one consultations with unbiased retirement planning consultants for guidance?

Individual, personalized investment perspective is key to ensuring employees are being represented in their best interests, free from conflict of interest or competing investment priorities.

Protecting Both Employers and Employees

We feel strongly that working with an independent investment consultant benefits everyone. For employers, working with an unbiased professional ensures fiduciary compliance, reduced liability, and better oversight of plan investments. For employees, having access to top-tier and well-researched investment options improves retirement outcomes.

To assess whether your retirement plan meets the highest possible standards for both your company and its employees, take our 16-Question Retirement Program Scorecard. This self-assessment tool will help you evaluate the independence and effectiveness of your plan’s investment options.

If you have concerns about conflicts of interest, plan compliance, or investment quality, we’re here to help. Contact us for a free independent review of your company’s 401(k) plan to ensure that it is truly working in the best interest of your employees.