401(k) Plan Sponsors Should Be Concerned More About Value In Fees

About 10 years ago, I started The Rosenbaum Law Firm P.C. and its original niche is different from the retirement plan focus of today.  My original ideas was that my law firm would be the Walmart of legal services. I would charge $100 for a plain vanilla will or preparation of income taxes (whatever the size) for $150. The idea was a tremendous flop because legal services are not something that people want to buy on discount like a pair of underwear or groceries.  So people won’t flock to get a will done for the cheapest price.

With retirement plan fee disclosure, many critics insist that plan sponsors will simply choose the cheapest provider because fee disclosure will focus on a retirement plan sponsor’s bottom line in the cost of plan administration.

A growing part of my practice is now representing registered investment advisory firms that want to enter into the retirement plan business or want to grow their practice. For a monthly retainer for as little as $500 (shameless, cheap plug), I work with my clients on their client agreements, compliance assistance, and marketing. One of the best questions out there that these clients or potential clients have asked me on what a reasonable advisory fee that they should charge their clients. That question is almost as painful as when one of my potential employers asked me how much money I wanted. For my end, I always shot myself in the foot. For the plan advisor, how much they should charge is a difficult thing to gauge.

Investment advisors should charge a reasonable fee. What is reasonable? That’s debatable, but I think reasonableness is based on what services they provide. As I had discussed previously, a recent client had a broker who was charging them 60 basis points for a $14 million plan. For a plan that size, that fee was high. When I did my Plan Tune-Up legal review for the client, I learned from them that there was no investment policy statement or education given to plan participants. So since the broker wasn’t doing his job, 60 basis points was obscene.

ERISA doesn’t require plan sponsors to pick the cheapest providers, they need to pick providers that charge a reasonable fee. So plan sponsors can hire a financial advisor who charges 75 to 100 basis points for plan advisory services as long as the services they provide make that rather large fee reasonable. All things being equal a financial advisor who is an ERISA 3(38) fiduciary should charge more than one who is a co-fiduciary or a broker who has no fiduciary role. Of course, my good friends James Holland and Tim Wood corrected me that in most situations, an ERISA 3(38) fiduciary is less expensive than the advisor they replace.

The same things go with third party administration (TPA) firms. Picking the cheapest TPA is usually a huge mistake because they tend to have the most errors and the worst service.  I have a client today that has only $1.5 million in assets, but opted for a TPA with a $7,500 minimum because they want that white glove service in administration and compliance that the TPA offers. I have had clients who later regretted using their payroll provider as a TPA.

So plan sponsors should focus less on low fees and more on value. They need to ensure that the fees they pay are reasonable for the services they get. Plan providers who go the extra mile should get paid for that, but plan providers that don’t provide enough value for the fees they charge should be replaced.

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