Today, the discussion of retirement plan advisors is continued by my colleague Paula Friedman—Managing Director of Employer Retirement Plans at McLean Asset Management. –Wade
My previous post discussed the differences between a traditional financial advisor that primarily works with individual clients and a retirement plan advisor that primarily works with corporate clients. This post will dive deeper into what you should expect from your retirement plan advisor and how they should be compensated.
Services to Expect from Your Retirement Plan Advisor
Although we have focused on non-investment-related aspects of the plan to highlight the importance of retirement plan advisors, investments are still a major component of their responsibilities. Every plan advisor should offer most, if not all, of the services listed below:
- Act as a fiduciary
- Provide an Investment Policy Statement (IPS) for adoption by the plan
- Select and manage the fund lineup for the plan based on IPS criteria
- Provide model portfolios to make it easier for employees to diversify their accounts
- Attend Investment Committee meetings or provide reports from internal meetings if acting as a 3(38) designated investment manager
- Provide periodic investment performance reports
- Conduct enrollment and education meetings for employees
- Coordinate with other plan service providers
- Provide operational support for ongoing plan administration
In addition to these core services, many advisors differentiate themselves by going beyond their traditional investment-centric role to assist with other aspects of the retirement plan. This could include any of the following:
- Vendor searches
- Fee and service benchmarking
- Documentation of meetings, plan reviews, vendor negotiations, etc.
- Vendor management and service reviews (advocating for clients)
- Compliance oversight
- Plan design consulting
- Managing transition to new providers (conversions)
- Education strategy review and recommendations
- Educational seminars or workshops (separate from enrolling in the plan)
- Targeted employee communications
- Individual planning and account review meetings with employees
- Relevant regulatory updates and industry news
- Comprehensive plan reviews (with documentation)
- Fiduciary training and best practices
The Cost of a Retirement Plan Advisor
There has been an enormous shift in fees charged by advisors in recent years. Driven primarily byDepartment of Labor (DOL) fee disclosure regulations passed in 2012, employers are now more aware of hidden fees and provider compensation. Many employers want transparent compensation structures that primarily use fixed fees instead of the traditional model of uncapped, asset-based fees.
The underlying motivation is that a plan with a higher asset balance doesn’t always equate to more work for an advisor. If the advisor does the same amount of work for a $5 million plan with fifty employees as he or she does for a $10 million plan with fifty employees, why should the larger plan cost twice as much?
But the cheapest advisor possible is not necessarily the best advisor. The most important factor is the value the plan receives in exchange for the fees. Determine what services you need and get proposals from a few advisors to see how they compare.
Many retirement plan advisors now use service tiers and custom pricing to align their fees directly with the services provided. This pricing method controls the costs of the plan, while compensating advisors for their time. For example, imagine an employer who wants plan-level support but does not need to provide individual participant meetings. The time requirement for the advisor is significantly decreased, resulting in a lower revenue requirement. Instead of paying a “one size fits all” fee, employers should only pay for the services they use.
Are You Paying a Reasonable Fee for Your Retirement Plan Advisor?
Retirement plan advisors charge a wide range of fees for the same set of services. Fees that are paid by participant accounts (those charged to plan assets) should receive greater scrutiny because they directly impact long-term account growth. A plan fiduciary has the responsibility to ensure plan fees are not excessive; however, they cannot evaluate them in a vacuum. Evaluating a quoted fee without understanding how it compares to similar plans is like saying the score of a football game is 21. Without knowing the opponents’ score, you have no idea who is in the lead.
The easiest way to determine if a fee is reasonable is to benchmark it. By comparing your plan’s fees and services to other similar plans, you can determine if a quoted fee is in line with the fees your peers are paying.
When reviewing advisor fee structures, find out what services are included in the benchmarked fee. For example, Advisor A may only include a limited scope of services for their fee. They may charge extra for additional services such as a vendor search or conversion to a new provider.
But Advisor B may include all of these services in their fee. Even though a first glance would make it look like they are charging more, the additional services covered by the fee might make them more reasonable. Don’t only compare by the basic costs. Make sure you clarify what services your plan needs when you request a proposal.
Getting Some Help with the Search
You might choose to use an independent consulting firm or a benchmarking service during this process. Just like advisors, these companies are not all the same. To make an apples-to-apples comparison, you should understand the data source being used to benchmark fees and the services included in the fee.
If you were in the market for an SUV, you wouldn’t compare the price of a small compact car to the price of a large, luxury SUV and go with the small car simply because it’s cheaper. It won’t meet your needs. You would compare SUVs to SUVs. The same holds true for employer-sponsored retirement plans—don’t compare costs for a small business plan that has a few employees to fees charged for a large retirement plan with thousands of employees.
Benchmarking can help you make sure your costs are reasonable. It can also help plan fiduciaries avoid litigation, because they can show that they followed a prudent process in reviewing plan expenses and hiring service providers.
Going from trying to manage your own retirement plan to working with a retirement plan advisor is like going from reading a paper map to having a GPS directing you. Both will help you arrive at your final destination, but using the GPS will require less time, energy, and effort on your part. Likewise, when you work with a professional who knows the way, your job is easier, especially when traffic and detours arise.
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