As both a career professional in the retirement plan field and a citizen observer reading media coverage about 401(k) plan sponsors having to defend themselves from an onslaught of “excessive fee” litigation in recent years, it seems clearly evident that in most instances only half the story is being reported. While clearly fees (or costs) are important with regard to any product or service rendered (financial or otherwise), the quality, value, and ultimate performance of the item purchased is just as important if not more so than fees.
In fact, “smart shoppers” always consider quality, value, and ultimate performance over price and are willing to pay more to enjoy those product or service attributes. Otherwise, Mercedes-Benz, Prada, Lanvin, Apple, Rolex, or Louis Vuitton and a thousand other product brands would not be household names. Brands in the service industry are viewed the same way. Think of the many service relationships you have and the reason why you return to them year after year.
It is really not all about cost. It is about the total package of “value received” including quality, performance, durability, end value, even how it makes you feel psychologically – and of course costs. The totality of all the above is why we pay what we pay and how we assess whether the costs are reasonable or not.
So let’s examine the fee discussion raging in the 401(k) market. By and large, parties bringing lawsuits against plan sponsors are complaining only that “fees are excessive.” The measure they use for “excessive” is that there exist lower fees that are available than those being complained about. Fee benchmarks are often referred to. As often as not, the benchmarks referenced represent broad averages of fees in generic categories and do not consider quality, value, level of service or ultimate performance.
Media coverage doesn’t address factors other than simply cost because that is how public announcement about the litigation is issued.
An important question then is should plan sponsors and fiduciaries become alarmed every time a new news report discloses another excessive fee complaint against a 401(k) plan? And how is a plan sponsor/plan fiduciary to know the scope of game rules necessary to be a “responsible plan fiduciary?”
One easy reference point is this: Department of Labor regulations state that a plan sponsor’s fiduciary obligation is to assure that plan participants pay plan expenses that are “…reasonable based upon the scope and value of products and services received.” The emphasis is on “reasonable” based upon “value received.”
To simplify, let’s examine two examples:
Example #1: Third Party Administrators (TPAs) who assist plan sponsors and fiduciaries with plan administration can provide a spectrum of many services for 401(k) plans (some of which may be paid by plan participants) – from accounting, to asset reconciliation, to recordkeeping, to participant loan processing, to vested benefit calculations, plan distributions, assistance with qualified domestic relations orders, discrimination testing, vested benefit statement preparation, fee disclosure notices to participants, and on and on. While many TPAs provide all these services, some elect only to specialize in a portion of them. Further, some TPAs provide very personal high-touch services such as assignment of a personal plan analyst on call at all times to both participants and plan sponsors, as well as many other tailored personal services.
Should all TPAs, then, charge the same fees? And if an “average number of TPAs” charge lower fees than some others, should plan sponsors and plan fiduciaries avoid using those who charge more, but who clearly provide “Mercedes-Benz” services? And if they do, should they be criticized or brought into court because participants in their plans pay higher fees? Clearly not. Remember “reasonable fees” for “value received” is the fiduciary’s obligation. Most plan fiduciaries will opt for “Mercedes-Benz” services for themselves and their plan participants simply because they desire the highest level of quality they can access, appreciating and respecting the expertise of professional TPAs over robo or impersonal online services offering no tailored personal TPA services to themselves or plan participants.
Example #2: Financial Advisors (who are also known as Retirement Plan Consultants or Wealth Management Consultants) offer a wide host of services to retirement plans and to plan participants, the most important of which is investment advice to both plan sponsors and participants with regard to the menu of participant investment options in 401(k) plans.
So here is a fee issue that is receiving headlines: Plan A’s advisor has assisted the plan sponsor in selecting a list of mutual funds that meets all the required rules (all asset classes, well-vetted, mix of index funds and actively managed funds, target date or managed allocation funds, specifically selected risk levels for each fund and each managed asset allocation, etc.) at costs which are quite low as compared to benchmarks.
Plan B’s menu of mutual fund options is the same in number and in basic character as those of Plan A, having every single one of the features described above for Plan A, including the same specifically selected risk level for each fund and each managed asset allocation. But the overall costs of Plan B are noticeably greater than those of Plan A. How and why can this be beneficial? A comparison of the “net rate of return” of each of the mutual funds on the menu of Plan A as compared with funds of the same asset class as in Plan B shows that Plan B’s net rate of return is greater in every instance than those of Plan A. In other words, after paying a greater level of fees, Plan B outperforms Plan A.
Advisors’ fees can be similar in nature, and in most 401(k) plans participants pay some advisors’ fees. Advisor A may charge fees lower than Advisor B. But a look at the services rendered by each shows that Advisor B offers a host of highly sophisticated and valued services that Advisor A does not. For instance, most advisors offer reviews of fund performance, investment selection advice, assistance with recordkeeper selection, investment policy statement drafting and perhaps fee analyses and benchmarking. But they elect not to offer services like those listed below which Plan B offers:
- Plan education programs.
- One-on-one participant education.
- Group participant education.
- Assistance in establishing, and attendance and participation in, fiduciary committee meetings.
- Review of plan menu options with fiduciary committee along with net performance results
- Technical help with plan sponsor transactions impacting participants, the plan and its operation.
- Ongoing plan operational compliance with all government law and regulations.
It is clear that services being rendered by the advisor to Plan B are not only broader in scope but also superior to those being provided by the advisor to Plan A. Thus, Plan B’s fees should justifiably be greater than Plan A’s. But the payoff to plan participants and the plan sponsor of using Plan B’s advisor is that even though the cost of both advisory service fees and fees of the investment menu are greater for Plan B than for Plan A, nevertheless Plan B’s net rates of return are greater than those of Plan A.
Should fees then be the only measure of reasonableness? The answer clearly is no. Remember, “reasonable fees” for “value received” is the fiduciary’s obligation.
Because 401(k) and other qualified retirement plans are so highly regulated, it is difficult at best for plan sponsors to remain informed in all aspects of plan compliance and operation. It is especially hard for professionals in the fields of medicine, dentistry, and other such specialties that have immense obligations to patients and for business owners and managers who do not specialize in ERISA and the whole spectrum of law and regulation governing retirement plans.
To receive a level of expertise that is professional and reliable in managing their business’ 401(k) plans, most such professionals and business owners seek a scope and quality of service greater than just average. And although it may cost more in fees, if those fees are “reasonable for the value received,” such plan sponsors should have nothing to be concerned about.
As a point of disclosure, ACG offers both TPA and investment advisory services to 401(k) and other types of qualified retirement plans to clients in the mid-Atlantic and across the nation. If you have an interest in discussing any of the concepts presented above, feel free to contact us.