When it comes to a discussion of excessive fees in the administration of retirement plans, everyone takes a look at the third party administration (TPA) firms. TPA firms get an inordinate amount the blame because when it comes to the continued qualification of a retirement plan, they do an inordinate of the work. Fact is that excessive fees can be charged by any retirement plan provider such as investment advisors, TPAs, audit firms, and ERISA attorneys.
What is excessive? It’s hard to define, but like former Supreme Court Justice Potter Stewart would say, I know it when I see it. Excessive fees really are dependent on the services provided. If a service provider is charging a lot more than another service provider and the amount and level of services provided is the same. Is a full blown retirement plan audit that a CPA firm charges $30,000 for, excessive? Maybe not, but a CPA firm charging $54,000 for a limited scope audit is (Yes Virginia, I recently saw that on a Form 5500).
For investment advisors, I see advisors charge anywhere from 25 basis points to 75 basis points to advise participant directed investment plans. The range of fees is dependent on the level of service, but most importantly based on assets. Small plans are charged more, percentage wise, because advisors need to be compensated for their work. Is 100 basis points for investment management on a participant directed 401(k) plan, excessive? Considering that the mutual funds already charge 50 to 150 basis points in management fees, I think so. Perhaps, advisory firms that charge that much add a level of service that I don’t know about.
As far as charging excessive fees, I think the biggest violators are ERISA attorneys. While most ERISA attorney fees are reasonable, I have seen some fees that are outrageous. A financial advisor advised me of a client who was charged $100,000 for a review of the plan document and administration services. I have seen plans charged hundreds of dollars for annual safe harbor notices when the only change was a find and replace of the year. I have seen plans charged $7,000 for a custom made plan when a less expensive volume submitter plan would have sufficed. To steal a line from former Supreme Court Chief Justice John Marshall, the power to bill by the hour can be the power to destroy. Except for Department of Labor and Internal Revenue Service audits/investigations, I charged a flat fee because after 12 years in the business, I know how much time plan document drafting takes. That is why a plan document is $2,000 and an amendment is $300 because I have low overhead, I don’t have 5 people in billing, partner lunches, or the law firm administrator drafting articles about why he had his Blackberry in Chile.
Fees need to be reasonable and not excessive, there is enough for any provider to survive and thrive in the retirement plan business.