401(k) fees are complicated to understand and subject to interpretation. It’s often believed that by cutting out a middleman you save money. Let me show you how that doesn’t necessarily work in your 401(k) plan.
Most plans use a registered representative (broker) as their plan advisor. This advisor is compensated based on a commission. When you buy things where a salesperson is compensated by commission you don’t know how their compensation might compromise the value of your purchase. I’ve recently met a couple of retirement plans where they purposely don’t have a broker or in their language don’t have an advisor. Not having a broker does not mean that you are not paying for one. The commission that would otherwise go to a broker might be going to the house. In a retirement plan your 401(k) fees could have been reduced if your recordkeeper has made an adjustment to the share class. That is not automatic. Unless you are retirement plan educated or have sought out a specialty designation, you probably wouldn’t know where to look.
Can you get more for the same 401(k) fees?
Let’s look at what might happen when there is no advisor compensation. Most plans have a Large Cap investment. It could be selected on popularity, past experience or say the proprietary line-up of your prime 401(k) service provider. Let’s say that your most used Large Cap Investment is 79 basis points. Another available choice costs 5 basis points. That is a 74 basis points difference. Let’s say that this represents 50% of the invested assets in a retirement plan. Let’s say that the plan hires an ERISA 3(21) investment advisor for 40 basis points.
Old Large Cap bps 79
New Large Cap bps 5
ERISA 3(21) bps 40
That fiduciary investment advisor replaces the 79 basis points investment with the 5 basis points one. The plan now has saved the participants 34 basis points and gets these following services:
- Fiduciary Services
- Ongoing investment monitoring
- Ongoing investment recommendations
- Qualified Default Investment Alternative (QDIA) assistance
- 404(c) assistance
- Non-Fiduciary Services
- Plan Benchmarking services of fees and services
- Investment Policy Statement (IPS) preparation assistance and review
- Assistance with changes in investment options
- Performance reports
- Plan sponsor education
401(k) Fees- Your fiduciary duty to get more for what they pay for
An ERISA 3(21) investment advisor assists the plan sponsor with investment fiduciary liabilities. The broker previously discussed legally does not. A broker lacking the knowledge of ERISA they may accidentally become a fiduciary by their actions. An ERISA 3(21) investment advisor does more than help you pick investments for your participants to pick from. Based on the demographics of your plan, they can help you examine ways to help your participants make informed investment decisions. Helping your employees prepare for a timely retirement makes good business sense and it meets the spirit of the Employee Retirement Income Security Act.
Have you had an independent benchmarking of your 401(k) fees? That is the DOL’s expectation of what you are to do with your plan sponsor fee disclosure [408 (b)(2) disclosure]. Your fees are supposed to be reasonable in light of the services received. You might find that a second look by an ERISA 3(21) investment advisor might show you how to get more for what you say is okay for your participants to pay.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.