Consider The Cost
There are four critical items plan sponsors need to understand or implement to help shield their retirement plans from unreasonable expenses.
Do you understand the game? In the retirement plan business, all consumers must understand that “the money is in the money.” The real profit associated with being in the retirement plan business is in the management of the money within the plan. Choices limited to a select menu of options can often be tracked back to a marketing incentive program by an investment company to a retirement plan provider or consultant. Therefore, a plan sponsor must be diligent in seeking this information, and a wise consumer, constantly evaluating the expense and commission structure within the investments of their plan.
Does your plan have open architecture? There are more than 14,000 mutual funds available in the marketplace today. A great number of them will be available to retirement plans at a lower cost then would typically be available to a retail investor. Despite the number of options available, most retirement plan providers limit the choices from which to select. These choices are often either proprietary and/or tied to the compensation paid by the funds to the provider for selling their funds. Today, however, some retirement plan providers offer clients a completely “open architecture” approach to plan investments allowing access to virtually any investment in the marketplace. This approach allows a plan sponsor to select the “best of the best” versus a select list of proprietary investments offered by the provider or from a single fund family that may be both expensive and poor-performing.
Does your plan have proper fee disclosure and transparency? Few plan sponsors really understand the total cost of their retirement plan because many vendors do not openly disclose their fees. In many cases, providers have various sources of revenue that are not obvious to their clients. These vendors often promote their services as being “free” when in reality they are limiting their clients to a select menu of proprietary and/or expensive investment options that include undisclosed sources of revenue that are not shared with the plan. Plan sponsors instead should demand that their retirement plan provider disclose 100 percent of all fees, including investment management, plan administration and consulting, sales commissions and other revenue sources. Plan sponsors should then insist that all hidden fees paid from any source be disclosed. Only then can you truly evaluate the provider with respect to fees. The Department of Labor is a great source and provides a simple tool to evaluate your current arrangement. http://www.dol.gov/ebsa/pdf/401kfefm.pdf
Is your plan provider a co-fiduciary? ERISA mandates that plan fiduciaries act in an impartial manner exclusively for the benefit of plan participants. Therefore, if your provider is working for varying levels of hidden compensation, they inherently cannot act as a co-fiduciary on your behalf. Their compensation structure is in direct conflict with their ability to act in an impartial manner. In order to protect themselves, the plan sponsor should either demand that their provider sign on as a co-fiduciary or hire an independent consultant that will act as a co-fiduciary and independent advocate for the plan and its participants.
