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How would you react if presented with the following: "My firm will provide investment advice for your participants for a fee that can be as much as the annual operating expenses of the funds. We won't explain our methodology nor can we demonstrate that we have actually increased the investment returns of our clients in the past. You'll take all the responsibility for hiring us because that's solely your decision."

How many employers would actually sign up for this service? More than you think. Let's back up and talk about investment advice using the terminology that's actually presented within the structure of a bundled recordkeeping environment and see how this works in real life.

The firm that provides the recordkeeping for your 401(k) plan has probably gone to great lengths to confirm that they do not act in a fiduciary role for your plan. They do what they are directed to do and can't be held liable for your decisions. A sister firm of the recordkeeper may provide trustee services but they too are quick to point out that they are only following orders as a "directed trustee" that takes all direction from you, the plan sponsor. Neither of these parties therefore, will claim any responsibility for the investments that appear in your plan and the ongoing success or failure of those investments.

The one element of your recordkeeper's product that appears to buck this trend is found in the advice solution being offered, as the marketing materials actually go to great lengths to discuss how the advice provider will share or relieve the plan sponsor of its fiduciary responsibilities. There are many different flavors of advice. Many/most provide online tools that make all investment decisions on behalf of the participants - a variation of this theme is the managed account service that charges an asset based fee to take charge of a participant's account.

Much of the marketing behind advice products goes to that common theme we've discussed before: we know something you don't know and you should pay us for it. Plan sponsors are, justifiably, looking for resources that can aid their participants and these pitches are difficult to ignore - especially when they're buried in the back of the larger service agreement.

Unfortunately, when pushed to present evidence that the advice service being offered actually does add value, we've often found that the advice provider considers that information proprietary. Moreover, when asked about the methodology utilized to create a portfolio we've often found that this too is proprietary (we were recently told that the advice provider might choose to use one particular fund within the menu on a Monday but a completely different fund in the same category on a Wednesday).

It gets worse from there as a quick read of the contract required by the advice provider typically includes language that says, in so many words, they can only be held liable for their actions/service if they are found to be fraudulent or negligent. They may, in fact, provide absolutely no upside in regard to returns but as long as they weren't fraudulent or negligent there is no recourse. We struggle with the idea of how to prove negligence in a situation where the advice provider has refused to confirm what it is that they are doing and how they are doing it.

In the most egregious examples, the advice provider's language stipulates that the plan sponsor retains final responsibility for the results as they are the party that approved the advice provider. I use the word egregious because in most cases a recordkeeping vendor is contracted with only one advice provider. The plan sponsor is therefore agreeing that, as the fiduciary, they reviewed the practices and methods of a number of advice providers and just happened to choose the one that was already linked to the recordkeeper.

In our non-lawyerly eyes, this is a precarious situation for a number of reasons. There is nothing wrong with an advice provider that can demonstrate its methodology and its value-add without excusing itself from all responsibility. The reality is that the advice providers that fit this description are few and far between. Here are some warning signs to be aware of:

• a portion of the advice/managed account fee is shared with the recordkeeper (who has nothing to do with the advice)
• a portion of the advice/managed account fee is shared with a broker/advisor attached to the plan (who has nothing to do with the advice)
• the advice provider is a sister firm of the recordkeeper or trustee
• the advice provider is unwilling to share past results
• the advice provider is unwilling to speak to their methodology or provide examples of their value add proposition in action.
• the contract for the advice provider makes fanciful claims regarding their selection ("the plan sponsor reviewed a number of providers and then, as the plan's fiduciary, selected us...")
• the contract for the advice provider relieves them of any/all responsibility for results with the exception of negligence or fraud.
• Your company is publicly traded and your stock is offered within the plan (if the advice ignores this investment in its analysis then the analysis is incomplete; if the advisor does take company stock into account and routinely advises the participants to sell it you potentially have a larger issue regarding the suitability of your stock).

In short, a quick decision to add what appears to be a benign resource may be the wrong thing for you and your participants. Plan sponsors that have already entered into this type of agreement should review the particulars in light of the points above and make sure that they are comfortable with the arrangement. You may well find that target or risk-based funds are a less problematic, less expensive approach.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb's first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.

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