One of the most overpriced 401(k) plans in Chicago
I had previously written about the fact that law firms are especially prone to excessive fees. I’d now like to provide an example of one of the most overpriced law firm retirement plans I have seen: Klein, Thorpe, and Jenkins. Here is a summary of the total service charges listed on their 5500 form:
2013: $49,694
2014: $75,103
2015: $69,031
2016: $64,631
2017: $69,938
2018: $76,667
2019: $78,275
2020: $84,210
2021: $108,404
2022: $106,399
2023: $105,522
The fees more than doubled from 2013 to 2021, but the number of participants remained about the same. As I have mentioned in previous posts, Vanguard serves as a good benchmark for what annual record keeping, administration, and custodial fees should be. In 2023, there were 54 participants with balances, so I know that Vanguard would have charged about $8,000 ($3,825 plus $75 for participants 16-50 Plus $70 for participants 51-100 plus around $700 to $1,000 for cross-testing) annually for these services because their fee structure is based on the number of participants rather than the plan assets. Granted, this does not include advisory fees, which should only be around $8,000 annually as well because there just isn’t that much time required for an advisor with so few participants. A slightly higher fee could be justified, but likely not that much since the plan assets have no bearing on the time the advisor spends.
Law firms should also compare their plan to the ABA Retirement Funds Program in terms of costs, features, and services. This program is unique for a couple of reasons. First, it does not allow financial advisors to receive an automatic payment from participants’ accounts. They either have to bill the company directly, or they have to come to an agreement with each participant who uses the self-directed brokerage account. Second, there is no limit to how much a participant can put in the self-directed brokerage account other than having to keep a minimum of $2,500 in one of the default investment options. And the brokerage account not only has no annual fee, but it also allows participants to avoid paying any advisory, record keeping, administration, or custodial fees which are included in the cost of the default investment options.
What also stands out is the fact that this plan does not offer self-directed brokerage accounts, which could have been a plausible explanation for these egregious charges since plan participants can come to whatever arrangement they want with an outside advisor. In this plan, however, participants only have access to a limited pool of funds, which limits the scope of the advisor’s services that are already limited by there being no tax consequences for selling funds inside of a qualified retirement plan account.
If I were a participant in this plan, I would ask the person/people in charge the following questions:
Have you ever benchmarked our fees against other providers like Vanguard who charge a fixed fee per participants that is independent of our plan assets or the ABA Retirement Funds program?
Have you conducted a survey of the plan participants to determine the extent to which they have utilized the advisor’s services?
Have you asked our for an itemized breakdown of the advisory, record keeping, administration, and custodial fees and specifically asked for the advisor to provide an accounting of which participants the advisor has had meetings/calls with each year and the duration of these meetings/calls?
In 2022 and 2023, about 28% and 26% of the participant contributions went to fees. Has the firm considered paying these fees instead of the participants? And would the firm have taken a closer look at these fees if they were actually getting billed?
The more participants and plan sponsors understand about fees, the more competitive the marketplace will be and the less likely these situations will occur. Shopping for a retirement plan should be as simple as shopping for a car. The best way to ensure this outcome is to demand fee disclosure documents that show all fees in actual dollars, not just in percentages so companies offering retirement plans to their employees can make proper comparisons among service providers.