Thanks to the fee disclosure regulations of Section 408(b)(2) and 404(a)(5), all of us in the retirement plan industry are a little fee-centric or fee-aphobic (depending on your role in the business).
The question I get a lot from a lot of financial advisors and third party administrators (TPAs) (I have an open phone policy for financial advisors and TPAs with questions) is what fees are reasonable. Reasonableness is quite vague, but is less vague than Potter Stewart’s definition of obscenity because you don’t have to see it to determine whether it’s reasonable or not.
As we know, plan sponsors as fiduciaries have a duty of prudence to pay reasonable fees. The law doesn’t say what reasonable is, but it’s really a sliding scale. It’s about the whether the fees are reasonable for the services provided. In addition it has to be reasonable as compared to what other providers charge for similar services.
So it is quite possible for a financial advisor to get an advisory fee of 75 basis points for a $1 million plan if the advisor is offering a full blown concierge service where the advisor is offering a ERISA 3(38) service, investment advice to participants, and monthly meetings with plan sponsors (hand holding is also a good idea). On the flip side, my legal review, the Retirement Plan Tune-Up got a broker fired from a $14 million plan because the broker was netting a fee of 60 basis points while not developing an investment policy statement (IPS) for the plan sponsor, not performing an annual review of investment options against the IPS, and not offering education to plan participants. Paying 75 basis points can be reasonable if you are getting prime service and 60 basis points is too much if you are getting nothing for it.
As part of the plan sponsor fee disclosure regulations under Section 408(b)(2), plan sponsors have to determine whether the fees they are paying are reasonable is to benchmark their fees using a service or shopping the plan to competing plan providers. Shopping the plan around isn’t just about price because you can always find a cheaper provider, you need to determine whether the fees being paid are reasonable for the services provided so picking a cheaper provider who isn’t providing 1/10th of the service the current provider is providing isn’t a good idea.
So what is reasonable? It’s all facts, circumstances, and ball bearings these days. It’s a lot of ingredients for that recipe, but a plan review will go a long way in determining whether it’s reasonable or not.