What is fee disclosure? What should be a simple answer to a simple question gets a little tricky when it comes to the administration of 401(k) plans. While the Department of Labor will require fee disclosure in 2011, it is kind of sad and amusing what some third party administrators (TPA), think what fee disclosure is.
What is fee disclosure to me? Pretty simply, an explanation to a plan sponsor on what fees the TPA is collecting and how those fees are being paid and from whom. As an attorney, my fees are pretty simple. Aside from IRS and DOL audits, I charge a flat fee. My Retirement Plan Tune-Up is $750 and plan documents are around $2,000, that’s it. Unlike most law firms, I don’t charge for copies, postage, binding and other petty things like phone calls. Starbucks doesn’t charge me for a straw after they got me for a $5 Frappuccino, so I won’t charge for the little extras because they are little.
When it comes to some TPAs, finding out how much you’re paying for 401(k) administration is like poker. You don’t know who has the best hand or who’s bluffing. These TPAs collect revenue sharing payments from mutual funds to offset administration fees and they play games as to how much they received or what they are being used for. In my mind, full fee transparency means the TPA tells you how much they got from the mutual funds companies and how they were being used. If the TPA is not telling you exactly how much they are receiving, they are not practicing full fee disclosure.
A few years back, there was a TPA who also had an RIA business in the Northeast that was known for taking revenue sharing payments and putting it in their pocket. After being bought by a national collector of RIA firms, they were told that this practice had to end and that they had to disclose their fees. Rather than being honest about these revenue sharing payments, they did something that was quite novel. They sent letters to all their clients with the intent of establishing an asset based fee for custodial platform administration services from between 10 and 20 basis points which revenue sharing payments will be used to offset. In English, this TPA invented a fee to justify the pocketing of revenue sharing. So it should be no surprise when I reviewed a plan from that TPA which when considering this asset based custody fee (which the plan custodian does not share), the plan sponsor was paying 200% more in fees than from a TPA with the same platform. Yet this TPA claims they practice full fee disclosure on their website. Full fee disclosure does not involve inventing fees to continue pocketing revenue sharing.
So in conclusion, full fee disclosure to me means a full breakdown of actual fees and how these fees are being paid, from the plan sponsor, the plan itself, or through reimbursements from the mutual fund companies. Anything less is hiding the ball.