Forget 401(k) Fees, More Money Might Be Lost Through Poor Plan Design

Many retirement plan advisors and third party administration (TPA) firms have been harping about 401(k) plan administration fees and in a belief that fees should be transparent, we now have fee disclosure that will come into effect in July.

While plan sponsors have the fiduciary responsibility to understand all the fees that they are paying and whether those fees are reasonable as to what is out there, I think plan sponsors lose more money in poor plan design than they do through excessive fees. Why there are no articles about poor plan design then? Well, poor plan design isn’t as sexy as high 401(k) fees and at the end of the day, there is more liability from excessive fees because with poor plan design, the only people who could sue the plan sponsors are plan sponsors and what’s the chances they will sue themselves?

What are poor plan designs? Plan designs that either no longer fit the needs of the plan sponsor or don’t include the efficiencies offered by current plan design. Case in point, a 401(k) plan that barely fail discrimination testing and the plan doesn’t offer automatic enrollment which would artificially raise the deferral participation rate of non-highly compensated so the plan will pass.  Another poor plan design is when a plan offers a new comparability/cross tested design with a safe harbor matching contribution. The problem? A safe harbor non-elective contribution could be used to satisfy required minimum gateway contributions to non-highly compensated employees, while safe harbor matching contributions do not which means that a plan sponsor using new comparability and safe harbor matching contributions may end up putting a lot more in contributions than they have to.

Poor plan design may also involve the lack of not augmenting the current plan with another plan like a cash balance plan or a non-qualified arrangement.

The value of a good financial advisor is not just relegated to helping manage the prudent fiduciary process of picking suitable investments and the development of an investment policy statement. A good financial advisor can clearly stand out by either being informed about plan design or being surrounded by TPAs and ERISA attorneys that do. The best TPA salesman I ever met, the late great Richard Laurita knew very little about the operations of retirement plans and he was honest about it. That is why on many occasions, he would have me accompany him to meetings with potential new clients or to be available by phone.  This level of service helped him nab a few more clients because it was something that a lot of low cost or bundled providers could not provide.

Retirement plan advisors need to stand out and I think it’s an added bonus to use a retirement plan consultant from the TPA or an ERISA attorney in the client solicitation process because it may save the clients money in improving the efficiency of plan design, but it also may impress the potential client that the advisor’s service is highly sophisticated, professional, and at a good value.

When it comes to advisors trying to net new business, I have always been supportive and I have an open phone policy because I believe retirement plans need to be improved and saved, one plan at a time.