Are You Paying a Higher Price for Loyalty?

Sheri Terens, CPA asks the tough questions when it comes to your employee benefit plans:



The hot topic over the last few years has been 401k fees. There are so many service providers associated with 401k plans that it’s hard to keep them straight: investment advisor, third party administrator, custodian, record-keeper and more. Do you know how they are getting compensated, and are you paying too much for remaining loyal to the same provider? Maybe, you’re just getting too lazy to do some benchmarking?

I worked with a client that complained to me he never saw his investment advisor. He said his advisor would only call for money when he needed to fund his plan, and he was getting compensated on a percentage of assets. I suggested we put the plan out to bid and see what kind of pricing and service we could get. Maybe he needed to pay a higher price for better service or maybe he wasn’t getting the value for the money he was paying.

As a plan sponsor, you are a fiduciary to the plan, and when using plan assets to pay service fees this requires you to act prudently and solely in the interest of plan participants. But, the fees must be reasonable.

Acting prudently doesn’t mean hiring your service provider because he’s your golf buddy. That doesn’t mean you have to write him off, but vet him; make him go through the proposal process. Does he handle 401k plans or does he mainly deal with individual retirement strategies? It is two different worlds and you want to work with someone that understands that. How do his fees and services compare to others?

Now, what about your fees? Are they reasonable? This all depends upon the facts and circumstances of the Plan. Take steps to understand the sources, amounts and nature of recordkeeping and investment management fees paid by the plan, as well as related services performed for those fees.  How can you determine “reasonableness” if you don’t understand what you are paying and the services you are getting for those fees? Take this knowledge and develop and document a process. By doing all this, you can avoid future lawsuits from plan participants and bad audit results from the DOL.

In addition to protecting yourself, benchmarking enables plan sponsors to lower their plan costs, expand and improve their service offerings and, in some cases, reduce fiduciary exposure.  At a minimum, benchmarking should be done at least every 3 years, according to DOL recommendation.

If you need help with this process, contact me. I’d be happy to share my experience with you.