Things Can Amount To A Hill Of Beans
Have you ever bought a can of beans at the grocery store? It is pretty easy to do, right? You might be looking for baked beans or red beans, but all you have to do is look for the type you want, check the price and grab the can off the shelf. Wouldn’t it be nice if all purchases were that simple? Sorry, that just isn’t the case. Whether you are buying a car or opening a checking account, transactions these days can be complicated. Pricing schemes and paperwork are only a couple of the difficulties one might face.
Pricing a 401(k) retirement plan can be downright daunting, especially if you don’t do so on a regular basis, which very few people do. As an advisor to 401(k) plan sponsors, I use excel spreadsheets to analyze pricing structures in order to develop apples to apples comparisons for clients. I can tell you flat out that it is nothing like buying a can of beans at the grocery. However, if you make the effort, you can get an accurate comparison and potentially reduce the fees of your plan, which effectively means more money in participants and sponsors pockets. We do this for our clients at ThirtyNorth Investments.
Many plan sponsors attempt to analyze plan fees, get about half way into it and throw up their hands in frustration. Then they return to the many other pressing matters of their organizations. At ThirtyNorth Investments, we help our clients determine exactly what and to whom they are paying fees for their plans. We do this regularly, so we know where to look.
When we begin to decide about our can of beans, we look at the three main components of plan fees:
1. Administrative costs – You might prefer Trappey’s or Bush’s Beans. These costs are akin to the brand of the plan and include plan record keeping, administrative (including filing of Form 5500), accounting, legal and trustee functions. Often a Record Keeper handles this entire area and charges your plan on a percentage of assets or flat fee basis. We strongly believe plan sponsors should pay a reasonable flat fee or a low asset based fee for these services. The amount of dollars in an account should not change the required administrative work.
2. Underlying fund management expenses – So, are we talking lima beans, pinto beans or green beans? These expenses are somewhat like the type of bean you choose and include the fees charged by the investment options in the plan. These fees vary widely from fund to fund and must be analyzed based upon the strategy of each fund. Whether the funds are actively or passively managed plays an important role in these costs and both styles have their pros and cons. The good news is that investment management fees have fallen substantially in the past 15 years. Unfortunately, many 401(k) plans have not tested the market to take advantage of these lower fees.
3. Investment Advisor fees – Sometimes, you might not know what type or brand of beans you want. Perhaps you heard one study last week that red beans were best for your health and another study this week that green beans are the best. On top of the studies, you have costs to consider. Plans pay an Investment Advisor fee for services to the plan sponsor and sometimes the plan participants to help weed through all of the questions that arise when making the choices. Advisors may consult with sponsors in carrying out their fiduciary duties required by ERISA law, and advisors may serve as fiduciaries as well.
ThirtyNorth Investments’ services include a review of plan design, features offered to participants, and plan investment options. We periodically consult with our clients regarding the need to request proposals from plan service providers in the marketplace. For some retirement plan clients, we also help participants plan for and work towards retirement readiness. Importantly, we serve as plan fiduciaries on the available investment choices alongside the plan sponsor.
The bottom line is that plan sponsors have a duty to ensure that the fees for plan services are reasonable. Who provides the above services and what they charge are important to the success of a retirement plan. This makes sense. Whether you are buying beans or some other food, you want it to be healthy and good, and you want to pay a reasonable price. That isn’t so difficult to achieve at the grocery store. The decisions you make on plan fees will impact the returns of each plan participant. Sometimes these decisions get a bit murky. However, plans can save money and benefit plan participants with the right advice from an independent advisor driven by the client’s best interests.
With the proper consideration of plan fees, plan sponsors may rest easier knowing that they are fulfilling this part of their fiduciary duty to the plan participants.