Nashville Business Journal
By Cam Goodwin, Guest Columnist
A politically charged debate is afoot in Washington, D.C., regarding accountability and fee transparency as it relates to brokers versus fiduciary advisers. Brokers are held to a “suitable” advisory standard at the time of recommendation. Fiduciary advisers have a standard that remains in place through the life of the client relationship.
This current discourse tends to focus on regulation as it pertains to individual wealth management, but larger questions loom when you extend the discussion to employee benefits. Ultimately the question is whether or not the adviser is accountable and transparent about their recommendations and compensation in the long-term interest of the plan sponsor and its employees.
Typically, a human resource officer is the gatekeeper for a benefits package. To do that job effectively, they need insight on the structure of the plan so they can make informed decisions. At this juncture, partnering with a fiduciary adviser who can shed light on the fees and compensation arrangements imbedded in these plans is crucial.
Here’s the short list of fees that may or may not be readily apparent when choosing a retirement plan benefits package:
Record Keeping, Administrative Fees and Contract Asset Charges
According to U.S. News and World Reports, 85 percent of plan sponsors pay these fees which can range from .01 to 37 percent of plan assets annually. And the more assets the plan accrues, the more fees you pay, despite the fact that the actual record keeping activity remains relatively the same.
This is an asset percentage fee levied for a bundled service scope. That bundle might include investment advice, research and brokerage fees. In this scenario, they are tied together to appear as though the plan sponsor is streamlining their cost, when in actuality, this activity really equates to your adviser performing the job you hired them to do.
Investment Management Fees
These are fees that are typically paid by the participants of the plan, and since the fees are being deducted from participant assets, they are not always brought to the attention of the sponsor. So, in many circumstances, neither the company or the employee see the actual management fee is that’s being assessed.
These fees derive from relationships that your record-keeper has with the various investment vehicles within a particular plan. In essence, the record-keeper and/or broker is compensated directly for selling a specific fund. This arrangement is pre-negotiated between the fund and the record-keeper, but is very rarely explained to the plan sponsor or the participant.
While this is not a fee in the strict sense of the word, many plans that are “developed” for a sponsor are really a re-hash of a generic strategy that was applied to another organization — no customization or strategic thought; it’s an off-the-rack solution that has proven adequate in other circumstances.
The take-away for plan sponsors / HR Professionals is to educate yourself on asking the right questions, and to build a relationship with a fiduciary advisor for whom investment recommendations must take into account the long-term strategy in the interest of your company, and its most valuable asset, the employees.