“The advisors are getting paid each time they go through the process with an employer to help pick funds as if they’re doing an original piece of work. There are more than half a million 401(k) plans, so that’s happened over half a million times. The fund menus aren’t that much different. But advisors are getting paid as if they’re doing an original piece of work. That’s just bizarre, extremely inefficient, and much too expensive.
First of all, they need to get away from asset-driven compensation and be paid a fee for service, the same as accountants or attorneys, who don’t get paid a percentage of corporate [client] assets. Their role should shift to helping people focus on how to succeed at retiring successfully, not on investment return. Building a smarter investment mix is pretty much of a commodity now. The focus should be on goals: “I want to retire successful. Help me do that.”
Instead of teaching clients small-cap, large-cap, value vs. growth and that stuff, help participants find ways to save more to do a better job of financial management and focus on the stream of income they’ll [need] for their retirement.”
Ted Benna, inventor of the 401(k), Founder and President of the 401(k) Association
401(k) Public Service Message: Understanding and Questioning Unfair Service Charges
Paul D. Sippil & Associates, LLC
What’s wrong with the industry?
Financial advisors who provide advice for group retirement plans justify their participant paid asset-based fee by misleadingly touting the value of selecting the investment options, acting as a fiduciary, and providing vendor search and benchmarking services. In reality, technology has commoditized their services, resulting in advisors often being significantly overcompensated at the participants’ expense which is rarely evident to either the participants or employers.
The real value lies in advisors taking the time to meet with participants and help them figure out how much to save, the level of investment risk that makes sense, whether to utilize a Roth or traditional 401(k) or combination of both, and effectively implementing a debt repayment plan if applicable. With regard to fiduciary services, simply having a fiduciary on the plan doesn’t mean much. The fiduciary needs to actually add value by taking actions such as constructing an investment policy statement, documenting plan sponsor and participant phone calls and meetings, and establishing an investment committee.
Just like any other service professional, the advisory fee should be based on time and value rather than a fee based on the value of the assets which has no bearing on the value or level of services provided. Ideally, the employer should pay this fee, which has the advantages of being tax deductible, helping the employees save more for retirement, reducing fiduciary liability, and putting employers in a better position to assess the true value of the services and effectively compare to other providers.
What you aren’t told
CNBC, Forbes, ABC News, and The Wall Street Journal have indicated most retirement plan participants most likely don’t understand the actual dollar amount of fees that service providers extract from your account based on their disclosure reports.
How can plan sponsors and employees make better decisions?
You learn how to effectively benchmark your plan and learn more about flat fee-based service providers not often included in benchmarking comparisons at http://401kprovidersearch.com.
Can retirement plan providers legally continue these practices?
The Department of Labor has added more disclosure requirements to increase transparency, but these fees are still complex and difficult to understand.