Excessive fees are only part of the Retirement Plan problem

I need to step away from the multiple employer plan situation for a moment, so my head doesn’t explode.

With July 1 around the corner, there has been so much discussion and consideration concerning plan fees. Again, a plan fiduciary such as a plan sponsor or trustee breaches have a fiduciary responsibility to pay reasonable fees.

Excessive fees have certainly gotten their play over the last few years and will certainly be on our most important concerns up until and after July 1st.

While excessive plan fees are evidence that there is a breach of fiduciary duty and part of the problem affecting 401(k) plans, to me, it’s not the most important issue that negatively effects retirement plans today.

To me, the greatest issue is the fiduciary process or lack thereof.  The issue is about placing the control of investments in the group with the least education to make informed decisions, the participants. This isn’t a criticism of the participant directed model under ERISA 404(c) that is supposed to limit a plan sponsor’s liability for losses sustained by participants in their investment direction. The problem is that most plan sponsors aren’t aware that they are losing the protection of ERISA 404(c) by neglecting their fiduciary duty. Picking a financial advisor who doesn’t help the plan sponsor in the fiduciary process, namely developing an investment policy statement and educating plan participants does a lot more harm than good.

An advisor friend of mine is prospecting a case recently where the plan has an ERISA 3(21) fiduciary as the advisor, who hasn’t changed the fund lineup in 5 years, has investment options that are duplicitous, and is missing certain area of the market for investment. Yet the current advisor is an ERISA 3(21) fiduciary. Let’s face it, the number sound nice, but an ERISA 3(21) fiduciary not doing their job is as Dean Wormer would say: an ERISA “0.0” fiduciary.

Plan sponsor as a whole don’t do a very good job with providing participants with enough education, so that the participants can make informed decision. While the Department of Labor allowed advisors to provide investment advice, very few have offered it because of the expense and very few know of other provider like RJ20.com that can offer the investment advice for a very reasonable per head charge.

So while so many advisors see fee disclosure as a win-win opportunity to gain clients, one should also look at potential clients with ineffective or missing in action advisors. However, plan paying excessive fees are probably more likely to have other fiduciary issues than companies that are paying reasonable fees. At least, that’s what I think.

So excessive fees are part of the problem, but I think the lack of participant education and lack of fiduciary oversight are bigger problems that won’t go away July 1.

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