Here is a typical interaction I have with a plan sponsor:
Financial Advisor: I’m calling to quickly figure out if some of the research I’ve done and work I do is relevant. If not, you’re welcome to hang up on me. I just wanted to see if you had a minute.
Plan Sponsor: What kind of research? If it’s about the 401(k) plan, we’re all set. We’ve done an extensive amount of due diligence recently.
Financial Advisor: I am not concerned with whether or not you are “all set.” I am simply trying to change the way in which the industry does business and help plan sponsors understand what’s actually going on without their knowledge. More specifically, I am trying to explain to plan sponsors that they should only be passing on flat dollar fees to their participants for all record keeping, administration, and advisory services.
Plan Sponsor: We just addressed what you mentioned. We have a broker and XYZ Company and only pay flat fees.
Financial Advisor: A broker by definition can only earn a percentage-based kickback paid by the mutual fund companies to retirement plan service providers and ultimately coming out of the participants’ pockets, which means a broker can only make money by directing you towards certain funds and investment platforms and away from others. And yes, you may be paying a flat fee for the administration, but administration is the smallest portion of the fees. XYZ’s business model is primarily based on revenue sharing, which by definition is also a percentage-based kickback. If they reduce their fee, it only means they reduced the percentage, and that percentage only gets reduced once the account balance grows, so paying a lower percentage on a higher balance is NOT a reduction in fees at all.
Plan Sponsor: Our broker does a good job. He comes out regularly to meet with the participants.
Financial Advisor: As I just mentioned, a broker can’t make any money unless he steers you towards certain platforms and funds. Furthermore, a broker cannot legally provide advice. Only a registered investment advisor can provide advice and charge a flat fee that is commensurate with how much actual work there is to do. Consequently, you need to keep him as far away from your participants as possible.
Plan Sponsor: I understand what you are saying, but we’re happy with our arrangement.
Financial Advisor: How can you be happy knowing that your providers are consistently getting significant raises (and therefore subjecting participants to continually higher fees) without doing any more work? And do you realize what administration and record keeping services actually entail and the difference between the two services? Administration is nothing more than giving plan design advice, preparing a tax form, and performing discrimination testing and other compliance services, while record keeping is nothing more than sending out statements, providing a website, and keeping track of participant balances. Can you honestly tell me that any advisor, broker, administrator, or record keeper is actually doing more work simply because the assets have increased? How can you justify any provider taking more money out of participants’ accounts just because the assets are greater?
Plan Sponsor: We have a good handle on things. We understand how our fees work.
Financial Advisor: Did you know that your provider’s primary pricing structure is a percentage-based fee or kickback based on cash flow contributions and the average participant account balance? What do any of these factors have to do with how much actual work there is to do? Did you know that there are many providers such as Vanguard, Ascensus, Aspire Financial, and Alliance Pension who only charge a flat dollar fee for all record keeping and administration services solely based on how many participants there are in the plan or how much actual work there is to do regardless of how much the plan has in assets?
Plan Sponsor: I’m really busy. I don’t have time to address this now.
Financial Advisor: I don’t doubt you are busy, but unfortunately, based on the fact that the vast majority (or perhaps all) of the fees retirement plan service providers charge are deducted out of participants’ accounts and therefore don’t affect the bottom line, the retirement plan will likely always be a back burner item which dis-incentivizes plan sponsors to scrutinize fees as closely as they would if they were instead writing a check.