How can a 401(k) specialist help reduce fees and share fiduciary duties?
A specialist can match your needs and expectations with those of an appropriate vendor. There are so many vendor options that it is hard for anyone that doesn’t specialize in this area to properly match your needs, expectations and costs with the various providers. The best answer for your company may be a plan that doesn’t pay commissions and uses low-cost mutual funds.
In addition, simply hiring a 401(k) specialist can cause vendors to be more proactive. Once you bring in a specialist, vendors realize that person knows how the game is played, and they may be more open to looking for ways to save you money or renegotiate fees.
As a fiduciary, the plan sponsor is personally liable in the event of a failure to fulfill his or her fiduciary responsibilities. But there’s no reason a plan sponsor should have to go it alone. Because 401(k) specialists focus on this area, they are typically a named fiduciary right alongside that sponsor. The two main differences between brokers and consultants are how they are paid and whether they can cross the line to fiduciary status. Many existing contracts specifically state that the vendor or broker will not be acting as a fiduciary.
What are the benefits of fixed pricing versus asset-based fees?
Historically, this has been an asset-fee business that charged on the size of your assets. If you have $1 million in your 401(k) plan and someone charges 50 basis points, that’s a $5,000 fee. When the plan grows to $2 million in assets, that fee goes to $10,000 regardless of whether your provider did any more work for you. The industry is seeing a switch to more fixed pricing despite the objections of many of the providers.
Fixed pricing allows for cost certainty and cost containment in your plan. If you pay $5,000 today on $1 million, and the plan goes to $2 million and you still pay $5,000, then the fee, as a percentage of assets, is declining as your plan assets continue to grow. Fixed pricing also allows your 401(k) specialist to focus on doing what’s best for your business instead of chasing the highest commissions.
How can benchmarking help you keep tabs on fees?
Benchmarking lets the plan sponsor see what it is paying in fees against comparable companies in its industry and of similar size. You need to distinguish between how much you are being billed and how much the vendor is charging participant accounts. The average plan sponsor, if the vendor doesn’t send a direct bill, may think the plan is free. But it’s not free. Everybody has to get paid, and if you’re not being billed directly, the expenses of the investments are higher and the participants are paying for those fees. Considering company executives typically have the highest balances, reducing asset-based fees is a win-win for everyone. When you start benchmarking, it becomes very apparent that your fees are X and they really should be X-minus.
Mike Rogers is director of pension services at Burr Pilger Mayer. Reach him at (408) 961-6336 or [email protected].