Paul D. Sippil & Associates, LLC

Take Action

To improve the quality and mitigate the cost of your retirement plan, here are three simple steps you can take:

1.  Pay hard dollar fees for all services including investment, administration, custodial, and recordkeeping fees.  This way you will not only know what all of your costs are, but you can also make meaningful comparisons of each component of your plan and ensure that all fees not related to the investment management are not increasing as the assets grow.  There is no reason for the participants to pay more money to the providers for a mere bookkeeping function simply because their assets have grown.  Retirement plan service providers should not be getting a raise without doing any more work if they are not directly contributing to the growth of participants' assets.


2.   Have an investment platform with no investment restrictions and offer exclusively passively managed portfolio models as default investment options.  If you insist on also having individual actively managed funds as default options, by paying only hard dollar fees to your advisors, almost all 12b-1 fees (these are the fees the investment broker receives as kickbacks from the funds) are credited back to the participants.  The small percentage of 12b-1 fees that is not credited back to the participants - usually 4 pecent or less - may be kept by the custodian.


3.  Appoint a registered investment advisor who acts as either an ERISA Section 3(21) fiduciary or ERISA section 3(38) investment manager to oversee the plan investment options instead of a commission-based broker who cannot act in a fiduciary capacity or legally provide advice. 

To quantify the results of participants' attempts to create their own portfolios, in a recent 20-year period, due to poor market timing, stock investors earned 3.8% a year - more than 5 percentage points less than the broad market as measured by the Standard & Poor's 500-stock index, which returned 9.1% on average, according to Dalbar, an investment research firm.

Consequently, because participants are so poor at managing their own investments and because they so rarely take advantage of the educational tools their employers offer them, having a plan that is trustee directed instead of participant directed (or at least a plan that only offers passively managed risk-based portfolio models that are automatically rebalanced at no additional cost) can often be more effective.  If you are concerned that trustee directed plan would add an additional layer of liability and responsibility, it is important to remember that having participant directed accounts does not necessarily protect employers from liability as they are not only liable for selecting and monitoring plan investments, but also the investment choices of the participants.  For this reason, delegating fiduciary duties to an independent fiduciary carriers even more significance. 

To further emphasize the importance of taking these actions, the Government Accountability Office reported the following:

“The Department of Labor has authority under ERISA to oversee 401(k) plan fees and certain types of business arrangements involving service providers, but lacks the information it needs to provide effective oversight.”

If the Department of Labor lacks the ability to effectively monitor retirement plans, how can any employer or participant make effective investigative inquiries?

Furthermore, according to the Investment Company Institute, costs for mutual funds in defined contribution plans have not kept pace with the decline in costs for mutual funds as a whole. To illustrate, from 1996 to 2010, the average equity fund costs in defined contribution plans declined by 0.13% (from 0.84% to 0.71%), while the average equity fund costs overall declined by 0.19% (from 1.03% to 0.84%).  Money market funds in defined contribution plans, however, while 0.09% less than money market funds overall in 1996 (0.43% vs. 0.52%), actually wound up exceeding money market funds overall in 2010 by 0.03% (0.28% vs. 0.25%)! How it is possible that the institutional buyer winds up paying more than the retail buyer?  Aren’t you supposed to get a discount when you buy in bulk?

Even more significant is the fact that these figures include defined contribution plans with billions of dollars who clearly have far more negotiating power than plans with only millions of dollars, so the average expenses in these smaller plans are actually much greater.  Consequently, you should not be asking yourself if your plan investment costs are reasonable compared to other plans, but if your plan costs are reasonable compared to mutual funds as a whole.  How can you claim that your plan costs are reasonable because they are in line with other plans in the industry when the entire industry is paying excessive costs?

Because retirement plan participants have such limited access to information, it is evident that we do not have a free market in the retirement plan industry as sellers are able to dictate prices.  In a purely competitive market, sellers are beholden to the demands of the buyers who have equal access to knowledge.  Consequently, only by gaining a true understanding of the nature and extent of all plan costs and services and demanding to pay separate hard dollar fees (which would be subject to far more scrutiny) for all retirement plan services will we be able to move in the direction of a transparent and competitive marketplace where the quality of services continues to improve and costs go down. 

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