I think it’s a safe bet to say we’ve all paid a lot more attention to retirement plan fees in the wake of the new Department of Labor disclosure requirements. This is true for 401(k)/403(b) plans and beyond. Fortunately (or unfortunately) we can’t avoid the topic!
It’s likely no one pays more attention than the plan fiduciary. After all it’s their job to work with the service provider and financial professional to make sure the fees paid by the plan are “reasonable.” But what exactly does “reasonable” mean?
While vague terms like this can seem to add to a plan fiduciary’s challenge, it’s actually pretty simple to understand. “Reasonable” doesn’t mean as low as possible. “Reasonable” means fees should be based on the services received in return.
To help gauge this, consider the services needed to help meet plan goals and objectives. Services for 401(k)/403(b) plans range from simple to highly complex. Simple, or low touch service from a service provider, should generally correlate with lower fees. More complex arrangements probably come with higher fees. But fees are just one part of the equation, and low cost isn’t always the best choice.
So … what does all this have to do with cars?
Start by thinking about what services may be appropriate to receive for a given fee. For comparison purposes, it’s actually a lot like buying a new car. Are you content with an economy model knowing it has the basic functions? Or, is it important to you to have all the conveniences available on the market and you’ll pay a premium to get them?
The financial professional can help determine which model best meets the needs of the plan, the plan sponsor and their participants:
1. The economy (low touch)
You’ve got everything you need to keep an annuity or mutual fund account running, but few bells and whistles. Typically includes:
- Processing plan contributions, transfers and distributions
- Generating automated reporting to the plan sponsor, including Form 5500 preparation
- Meeting with the plan sponsor to conduct a periodic review, and providing additional phone support to answer administrative questions
- Providing cookie cutter participant communications aimed toward saving and distribution, with additional support often offered through an 800 number
2. The mid-sized sedan (moderate touch)
A step up from the economy, your mid-sized sedan offers some conveniences generally for a little bit more money.
Typically includes everything the economy does, plus:
- Additional personalized plan sponsor meetings and support tailored to the needs of the plan sponsor
- More extensive participant education resources, including help with planning (but no individualized approach)
- Phone support available to help with questions beyond administrative and processing
3. The luxury model (high touch)
This model comes with all the bells and whistles, generally at the highest price.
Typically includes everything listed above, plus:
- Detailed plan design consulting tailored to the needs of the plan sponsor and participants
- Detailed plan analysis, including plan utilization reports and progress reports to help ensure objectives are being met.
- Individualized participant support with a focus on becoming more “retirement ready”
- More extensive administrative support, including audit preparation
Making sense of it all
It’s important that the plan fiduciary and financial professional work together to determine which model best helps meet the plan needs, whether the model is functioning to their satisfaction (e.g., are the services being provided competently?), and if the fees are reasonable in light of the model and functionality.
The car model analogy provides a simple framework to help start that conversation.
In addition, this checklist can help serve as a guide for how to establish a documented monitoring process to fit the specific needs of a plan.