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Selecting a 401k Broker or 401k Brokerage

This document provides basic information to help investors select a 401k brokerage firm and sales representative, make an initial investment decision, monitor an investment and address an investment problem. It is intended to help you identify questions you need to ask and warning signs to look for in order to avoid possible investment problems.

If you need more information about a matter discussed in this brochure, or you think that the securities laws have been violated, you should contact the appropriate securities regulators. The names, addresses and telephone numbers of these organization are listed at the end of this document.

A Tip About 401K
According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).

The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.

401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.

Selecting Your 401k Broker

Before making a securities investment, you must decide which 401k brokerage firm - also referred to as a 401k broker/dealer - and sales representative - also referred to as a stock401k broker, account executive, or registered representative - to use. Before making these decisions you should:

  • Think through your financial objectives and prepare a personal financial profile.
  • Talk with potential salespeople at several firms. If possible, meet them face to face at their offices. Ask each sales representative about his or her investment experience, professional background, and education.
  • Find Out about the disciplinary history of any 401k brokerage firm and sales representative by calling 1-800-289-9999, a toll-free hot line operated by the National Association of Securities Dealers, Inc. (NASD). The NASD will provide information on disciplinary actions taken by securities regulators and criminal authorities. Your state securities regulator also can tell you if a sales representative is licensed to do business in your state.

    This is very important, because if you do business with an unlicensed securities 401k broker or a firm that later goes out of business, there may be no way for you to recover your money-even if an arbitrator or court rules in your favor.
  • Understand how the sales representative is paid; ask for a copy of the firm's commission schedule. Firms generally pay sales staff based on the amount of money invested by a customer and the number of transactions done in a customer's account. More compensation may be paid to a sales representative for selling a firm's own investment products. Ask what "fees" or "charges" you will be required to pay when opening, maintaining, and closing an account.
  • Determine whether you need the services of a full service or a discount 401k brokerage firm. A full service firm typically provides execution services, recommendations, investment advice, and research support. A discount 401k broker generally provides execution services and does not make recommendations regarding which securities you should buy or sell. The charges you pay may differ depending upon what services are provided by the firm.
  • Ask if the 401k brokerage firm is a member of the Securities Investor Protection Corporation (SIPC). SIPC provides limited customer protection if a 401k brokerage firm becomes insolvent. Ask if the firm has other insurance that provides coverage beyond the SIPC limits. SIPC does not insure against losses attributable to a decline in the market value of your securities. For further information, contact SIPC at 805 Fifteenth Street, N.W., Suite 800, Washington, D.C. 20005-2207; or call (202) 371-8300.

Remember, part of making the right investment decision is finding the 401k brokerage firm and the sales representative that best meet your personal financial needs. Do not rush. Do the necessary background investigation on both the firm and the sales representative. Resist salespeople who urge you to immediately open an account with them.

Making An Investment
The New Account Agreement

Generally, a 401k brokerage firm will require a customer to sign a new account agreement. You should carefully review the information contained in this document because it may affect your legal rights regarding your account.

Ask to see any account documentation prepared for you by the sales representative. Do not sign the new account agreement unless you thoroughly understand it and agree with the terms and conditions it imposes on you. Do not rely on verbal representations from a sales representative that are not contained in this agreement.

The sales representative will ask for information about your investment objectives and personal financial situation, including your income, net worth, and investment experience. Be honest. The sales representative will rely on this information to make appropriate investment recommendations for you.

Completion of the new account agreement requires that you make three critical decisions:

  1. Who will control decision-making in your account? You will control the investment decisions made in your account unless you decide to give discretionary authority to your sales representative to make investment decisions for you. Discretionary authority allows a sales representative to make investment decisions based on what the sales representative believes to be best - without consulting you about the price, the type of security, the amount and when to buy or sell. Do not give discretionary authority to your sales representative without seriously considering whether this arrangement is appropriate for you.

  2. How will you pay for your investment? Most investors maintain a cash account that requires payment in full for each a security purchase. An alternative type of account is a margin account. Buying securities through a margin account means that you can borrow money from the 401k brokerage firm to buy securities and requires that you pay interest on that loan. You will be required to sign a margin agreement disclosing interest terms. If you purchase securities on margin (by borrowing money from the 401k brokerage firm), the firm has authority to immediately sell any security in your account, without notice to you, to cover any shortfall resulting from a decline in the value of your securities. If the value of your account is less than the amount of the outstanding loan - even due to a one day market drop - you are liable for the balance. This may be a substantial amount of money even after your securities are sold. The margin account agreement generally provides that the securities in your margin account may be lent out by the 401k brokerage firm at any time without notice or compensation to you.

  3. How much risk should you assume? In a new account agreement, you must specify your overall investment objective in terms of risk. Categories of risk may have labels such as "income," "growth," or "aggressive growth." Be careful you understand the distinctions between these terms, and be certain that the risk level you choose accurately reflects your investment goals. Be sure that the investment products recommended to you reflect the category of risk you have selected.

When opening a new account, the 401k brokerage firm may ask you to sign a legally binding contract to arbitrate any future dispute between you and the firm or your sales representative. This may be part of another document, such as a margin agreement. The federal securities laws do not require that you sign such an agreement. You may choose later to arbitrate a dispute for damages even if you do not sign the agreement. Signing such an agreement means that you give up the right to sue your sales representative and firm in court.

You may have your securities registered either in your name or in the name of your 401k brokerage firm. Ask your sales representative about the relative advantages and disadvantages of each arrangement. If you plan to trade securities regularly, you may prefer to have the securities registered in the name of your 401k brokerage firm to facilitate clearance, settlement, and dividend payment.

The Investment Decision

Never invest in a product that you don't fully understand. Consult information sources such as business and financial publications. Information regarding the fundamentals of investing and basic financial terminology can be found at your local library.

Ask your sales representative for the prospectus, offering circular, or most recent annual report - and the "Options Disclosure Document" if you are investing in options. Read them. If you have questions, talk with your sales representative before investing.

You also may want to check with another 401k brokerage firm, an accountant, or a trusted business adviser to get a second opinion about a particular investment you are considering.

Keep good records of all information you receive, copies of forms you sign, and conversations you have with your sales representative.

Nobody invests to lose money. However, investments always entail some degree of risk. Be aware that:

  1. The higher the expected rate of return, the greater the risk; depending on market developments, you could lose some or all of your initial investment, or a greater amount.
  2. Some investments cannot easily be sold or converted to cash. Check to see if there is any penalty or charge if you must sell an investment quickly or before its maturity date.
  3. Investments in securities issued by a company with little or no operating history or published information may involve greater risk.
  4. Securities investments, including mutual funds, are NOT federally insured against a loss in market value.
  5. Securities you own may be subject to tender offers, mergers, reorganizations, or third party actions that can affect the value of your ownership interest. Pay careful attention to public announcements and information sent to you about such transactions. They involve complex investment decisions. Be sure you fully understand the terms of any offer to exchange or sell your shares before you act. In some cases, such as partial or two-tier tender offers, failure to act can have detrimental effects on your investment.
  6. The past success of a particular investment is no guarantee of future performance.

Protect Yourself

A high pressure sales pitch can mean trouble. Be suspicious of anyone who tells you, "Invest quickly or you will miss out on a once in a lifetime opportunity."


  • Never send money to purchase an investment based simply on a telephone sales pitch.
  • Never make a check out to a sales representative.
  • Never send checks to an address different from the business address of the 401k brokerage firm or a designated address listed in the prospectus.

If your sales representative asks you to do any of these things, contact the branch manager or compliance officer of the 401k brokerage firm.

Never allow your transaction confirmations and account statements to be delivered or mailed to your sales representative as a substitute for receiving them yourself. These documents are your official record of the date, time, amount, and price of each security purchased or sold. Verify that the information in these statements is correct.

Certain activities may indicate problems in the handling of your account and, possibly, violations of state and federal securities laws.

Be alert for:

  1. Recommendations from a sales representative based on "inside" or "confidential information," an "upcoming favorable research report," a "prospective merger or acquisition," or the announcement of a "dynamic new product."
  2. Representations of spectacular profit, such as, "Your money will double in six months." Remember, if it sounds too good to be true, it probably is!
  3. "Guarantees" that you will not lose money on a particular securities transaction, or agreements by a sales representative to share in any losses in your account.
  4. An excessive number of transactions in your account. Such activity generates additional commissions for your sales representative, but may provide no better investment opportunities for you.
  5. A recommendation from your sales representative that you make a dramatic change in your investment strategy, such as moving from low risk investments to speculative securities, or concentrating your investments exclusively in a single product.
  6. Switching your investment in a mutual fund to a different fund with the same or similar investment objectives. Unless there is a legitimate investment purpose, a switch recommended by your sales representative may simply be an attempt to generate additional commissions for the sales representative.
  7. Pressure to trade the account in a manner that is inconsistent with your investment goals and the risk you want or can afford to take.
  8. Assurances from your sales representative that an error in your account is due solely to computer or clerical error. Insist that the branch manager or compliance officer promptly send you a written explanation. Verify that the problem has been corrected on your next account statement.

Q. How do I select a 401(k) financial advisor?

A. It is a good idea to interview no fewer than three advisors before you make a selection. You are choosing a person whom you must trust, and whose advice you will be willing to follow. Therefore, the personal chemistry between you must be one that fosters trust. Here are some guidelines you can follow:

Question the advisors during your interviews. Ask about the advisor's performance results for his/her clients. Ask where the advisor obtains technical information to support his/her work.

Ask about the advisor's licenses. To give investment advice, an advisor must be registered with the Securities and Exchange Commission (SEC) or a state securities department. If the advisor sells or places products pursuant to your plan, s/he must be licensed by (1) a state insurance department (insurance and annuities), (2) a state securities department (mutual funds, limited partnerships, etc.), or registered with a member of the National Association of Securities Dealers (NASD) (securities). Is s/he a Registered Investment Advisor? An explanation of some of the various licenses held by 401(k) financial planners can be found a few questions down in this section. Ask if the advisor has ever been fined, reprimanded, or suspended. Verify the answer by contacting your state securities department, state insurance licensing/regulation department, the National Association of Securities Dealers (NASD), and the U.S. Securities and Exchange Commission (SEC).

Ask about the advisor's education and credentials. Does the advisor keep up to date in the field through continuing education? There are many capable advisors who perform excellent service for their clients, some who have earned one or more designations, and some who have not. Ask if the advisor holds a credential such as Certified Financial Planner®, Certified Public Accountant, or Chartered Life Underwriter? If so, the planner is subject to the ethical requirements of the credentialing organization as well as varying degrees of continuing professional education. For information about what the many credentials mean, click here. You may contact the credentialing organizations to determine if the advisor's designation is still valid and if there have been any ethical sanctions placed on the advisor.

Ask for the advisor's references. It is reasonable for you to speak with current clients and other 401(k) financial professionals (such as accountants or attorneys with whom s/he has worked). Ask to see samples of financial plans that s/he has developed for other clients in circumstances similar to yours, and for circumstances that you aspire to achieve.

Ask the advisor if s/he will be recommending a full range of 401(k) financial products from a variety of 401(k) financial service companies, or only those of a single company.

Ask the advisor about fee arrangements. Advisors are compensated by hourly fee, project fee (e.g. the drafting of a financial plan), management fee (generally 1.5% of invested balances under management), commission (paid by the financial company issuing the mutual fund or insurance policy), or by a combination of these methods (e.g. fee plus commission).

Finally, be prepared to give the advisor enough information about yourself to allow him/her to make the decision to accept you as a client. Just as the match with an advisor must be right for you, many advisors find that they do their best work when they are equally thorough in their selection of clients.

Q. What do the different licenses and certifications mean?

A. Here are some of the most widely known financial credentials being advertised by 401(k) financial advisors today (IRA.com does not endorse any particular designation, and offers this for informational purposes only).

CFA: Chartered Financial Analyst.
Awarded by the Association for Investment Management Research, this technical designation is designed for investment professionals to support the skills required for portfolio management and investment analysis. Candidates for the charter must pass three levels of examination (one exam may be taken per year). Preparation is via self-study of a body of knowledge published by AIMR and includes financial statement analysis, securities regulations, ethics, capital markets, asset allocation, and application of theoretical concepts. Candidates must accrue three years of related experience and establish AIMR membership prior to award of the charter. AIMR does not mandate continuing professional education for maintenance of the CFA charter.

CFP: Certified Financial Planner®.
Awarded by the Certified Financial Planner Board of Standards, this designation is characterized by the CFP board as a license. Candidates must pass a comprehensive 10-hour examination testing the candidate's knowledge of 401(k) financial planning, investments, estate planning, tax and retirement planning, and ethics. Preparation for the examination is via five or more educational courses under a curriculum approved by the CFP Board and offered at more than 100 institutions throughout the United States. Candidates must have three years 401(k) financial planning experience plus an undergraduate degree to qualify for the award of the license (five years without a degree). CFP licensees are required to renew their license every two years through the completion of 60 hours of continuing education.

ChFC: Chartered Financial Consultant.
Awarded by The American College, this designation is based on the completion of eight distance-learning courses offered by the College. Candidates qualify sequentially through separate post-course examinations. Courses, five of which are approved by the CFP Board as preparation for the CFP license, include 401(k) financial planning, investments, estate planning, tax and retirement planning. Candidates must have two years related business experience plus an undergraduate degree to qualify for award of the ChFC (three years without a degree). Designees who matriculated after June 30, 1989 must renew their designation every two years with the completion of 30 hours of continuing education (designees who began their ChFC studies prior to the 1989 deadline may not be required to prove their attendance at continuing education programs).

CLU: Chartered Life Underwriter.
Awarded by The American College, this designation is based on the completion of eight distance-learning courses offered by the College. Candidates qualify sequentially through separate post-course examinations. Course work emphasizes use and application of life insurance and may encompass life, disability and long-term care insurance, employee group benefits, pensions, and financial, estate, and retirement planning. Candidates must have two years related business experience plus an undergraduate degree to qualify for award of the CLU (three years without a degree). Designees who matriculated after June 30, 1989 must renew their designation every two years with the completion of 30 hours of continuing education (designees who began their CLU studies prior to the 1989 deadline may not be required to prove their attendance at continuing education programs).

CPA: Certified Public Accountant.
Awarded by the 54 U.S. state and territorial boards of accountancy upon the successful completion of four separately scored examinations covering auditing, business law, accounting and reporting on business enterprises, and accounting practices for taxation, managerial, government and nonprofit organizations. CPAs must meet individual state standards for continuing professional education every two years.

CPA/PFS: Personal Financial Specialist.
Awarded by the American Institute of Certified Public Accountants (AICPA) to members who hold a valid CPA license, have passed an examination, and who have completed 750 hours of 401(k) financial planning practice within the previous three years. Renewal requires annual maintenance of the CPA and membership in AICPA, completion of 72 hours of continuing professional education every three years and 750 hours of practice in financial planning every three years. Practice may include personal financial planning process, personal income tax planning, risk management planning, investment planning, and retirement planning.

Q. How can I compare the different designations for Financial Planners?

A. Earned credentials are an important indication of an advisor's academic preparation to serve clients. However, not all designations are created equal. When an advisor presents him/herself as qualified by one or more professional designation, there are four basic questions that you should answer to determine the professional standards represented by the credentials.

Is the designation client-oriented? Some designations are designed for financial managers who work for corporations and are better classified as technical credentials. Advisory designations test the advisor's understanding of an individual client's total financial situation: age, earnings, dependents, tax circumstances, risk tolerance, expense requirements, and much more.

Does the designation demand that the candidate prove mastery of a body of knowledge? Reputable designations require that the candidate pass one or more examinations proving his/her understanding of the technical material represented in the credentialing program. How rigorous is the preparation required for the examination? Some designations simply require attendance at a single seminar and payment of a fee. Considering the complexity of the 401(k) financial services environment, clients must expect more from their advisors.

Does the designation require continuing professional education? Financial Services is one of the most rapidly changing areas of business today. These changes can present a bewildering array of decisions to be made by consumers. Does your advisor stay abreast of this changing environment with a designation that requires a minimal level of continuing professional education?

Is the designation controlled by an independent organization and supported by a code of ethical conduct and/or professional standards? A strong sponsoring organization is your protection should an advisor prove unworthy of the standards of his/her designations. Designation sponsors take seriously the integrity of their brands and will support the clients' interests in order to assure respect for all who advertise the designation. Statutory standards for licensing are generally less stringent than the ethical standards required of most voluntary credentials. Also, some designations have been created by groups of advisors to help them sell their services without having to prove their qualifications to an independent testing organization. Some of these "house" programs are quite effective, but the consumer should be careful to investigate.

If You Have a Problem

If you have a problem with your sales representative or your account, promptly talk to the sales representative's manager or the firm's compliance officer. Confirm your complaint to the firm in writing. Keep written records of all conversations. Ask for written explanations.

If the problem is not resolved to your satisfaction, contact the appropriate regulators listed at the end of this document. Investor complaint information assists these regulators in identifying violations of the securities laws and prosecuting violators. However, none of these organizations is authorized to provide legal representation to individual investors or to get your money back for you.

Obtain information on using arbitration to resolve your dispute by contacting the NASD, New York Stock Exchange, American Stock Exchange, Municipal Securities Rulemaking Board, Boston Stock Exchange, Chicago Board Options Exchange, Chicago Stock Exchange, Pacific Stock Exchange, or Philadelphia Stock Exchange. Each of these organizations operates a forum to resolve disputes between 401k brokerage firms and their customers. It may be desirable to consult an attorney knowledgeable about securities laws. Your local bar association can assist you in locating a securities attorney.

Securities Regulators To Contact

U.S. Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549
Office of Investor Education and Assistance
Online Complaint Form

North American Securities Administrators Association, Inc.
Suite 710
10 G Street, NE
Washington, DC 20002
(202) 737-0900


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