Advisor Fees: What Costs Are Associated with 401(k) Plan Advisors?
Most companies recognize the benefit of offering a 401(k) plan to help retain and attract quality employees. And many of those companies also recognize the risks associated with such plans, and look to outside resources to help manage the plan. But selecting the right advisor and understanding their fee structures can sometimes be as complicated as deciphering the regulations put forth by the Department of Labor.
So, what questions should you be asking plan advisors?
How much would they charge to manage your plan? Are they fee-based, or do they collect 12b-1 commissions from the mutual funds in the plan? Is their fee entirely asset-based or is there a hard dollar component?
Knowing the answer to these questions is crucial to your role as a plan fiduciary. In fact, as part of the recently enacted fee disclosure regulations — 408(b)2 — plan fiduciaries have an obligation to determine if the fees they are paying to service providers are reasonable. It stands to reason that if you don’t know what those fees are, or how they are calculated, then you can’t really determine if they are reasonable.
In the early days of 401(k) plans, just about every plan available was commission based. A broker would sell a plan to a client, and then would collect the 12b-1 fees on the mutual funds inside the plan. This was known as a “trail commission.” The larger the plan grew, the larger the commission checks grew. If your company’s 401(k) plan grew rapidly from $2 million in assets to $4 million in assets thanks to a great stock market, would your broker deserve a 100% raise?
What if some of the funds in the plan pay different amounts of 12b-1 commissions? Would your broker be incentivized to steer employees into funds that pay the broker higher commissions? It is easy to see the potential for conflict in situations like this.
Such situations can be remedied by working with a fee-based advisor. Fee-based advisors generally charge a flat rate (asset based, hard dollar, or combination) across the entire plan, regardless of the mutual fund options available. This creates a conflict free environment and ensures that your employees can get unbiased advice. And, if you are looking for an advisor that provides 3(38) fiduciary protection, such services are not provided from a commission-based advisor.
And, finally, what is a reasonable rate for an advisor to charge? The DOL does not define “reasonable.” So, it becomes the responsibility of the plan sponsor to evaluate the entire scope of the services offered by the advisor, and to document the process that led to any conclusions.