“You get what you paid for” is a common expression, and often this expression is true because when you pay more for something, you’re supposed to get more in return. However, it doesn’t quite work that way in the retirement plan industry for a few reasons. First, unlike the lower cost providers, the most expensive providers primarily charge for their services based on a percentage of plan assets, so as the assets increase, the fees in absolute dollars increase in spite of the fact that the percentage declines. Consequently, these providers will continue to charge more without providing any additional services in return. Second, the large providers include most of their ongoing fees within their “all-in” percentage-based fee whereas the lower cost flat dollar fee-based providers tend to provide an a la carte pricing structure where plan sponsors can choose to purchase additional services if they need them.
Overall, all providers basically provide all of the same services. They just price these services differently. However, large providers who charge asset-based fees still argue they offer more comprehensive services. This claim is simply false. One example is bilingual education services. While these services are clearly important for companies with a non-English speaking population, they are not unique to large providers. In fact, some large providers actually outsource bilingual education services to outside firms even though these services are still branded as being provided by the large providers. Because these same outside firms can partner with any provider, there is no advantage to using a larger more expensive provider. The only difference is that plan sponsors would have greater flexibility in choosing which services they want to pay for with a lower cost provider. Another example is the ability to offer more default investment options. This offering actually harms participants more than it helps as explained in an earlier post entitled Why Most Plans Have too Many Fund Choices.
This flexibility is especially important because almost all plan sponsors wind up paying for services that participants don’t ever use – which occurs mainly because plan sponsors have little understanding of what they are actually paying for as well as how to compare pricing of plans. While providers may tout their statistics on how much participants contribute and how often participants use the website, the bottom line is that participants normally through their money into a fund (or multiple funds) and leave it there without having any idea of what they are doing in spite of the wide array of “educational” services which wind up confusing participants more than helping them. In fact, participants shouldn’t be making many changes to their portfolio anyway, as evidenced by the fact that low cost portfolio models (i.e. conservative, moderate, aggressive) are available at a cost of less than 0.10% and can automatically be rebalanced by any record keeper as often as quarterly at no additional cost.