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Thursday April

  • 2013
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You Make the Call !

by Martin Suechting in Benefit Plans

Back in the late ‘80s and early ‘90s IBM and others sponsored ads in NFL games called ‘You Make the Call'. The idea was to show you a clip from a controversial play, and then the announcer would demand ‘You Make the Call'. After that came the ad, then a recap and the ‘right' answer to whatever the infraction was. They no longer run those ads in NFL games, but some ideas never die.

 Part of an ERISA fiduciary's responsibility is to determine if the fees paid for services rendered to a plan are ‘reasonable'. We recently looked at two 401(k) retirement plans each having about $16.5 million in assets, although the participant counts were different - about 130 participants in one plan, and 400 in the other. Each of the plan sponsors thought they were paying ‘reasonable' fees, but as we found out in the course of our study, the fees each plan paid were significantly different.

Are the fees reasonable? You make the call!

Plan A thought they were getting a great deal because they never received an invoice except for the annual audit fees from their accountant, which they paid from corporate funds, so the plan was not impacted: it is a “FREE” plan. Plan B was paying what they thought were ‘reasonable' fees totaling $44,000 annually (about 0.27%, or 27 basis points) to their recordkeeper, trustee, and their investment advisor. Like Plan B, their annual audit fee was paid for by the corporation, with no impact to the plan.

Interestingly, both plans use the same open architecture independent third party administrator for daily valuation recordkeeping, although the corporate trustee/custodian used was different. Plan A's investment advisor is from a large well known brokerage firm, and Plan B uses an independent RIA firm. Each of the plans had regular quarterly meetings with their advisor, and the advisors also provided periodic employee education meetings.

The real difference between the plans is in the mutual fund lineups. We compared total fund expenses by taking a snapshot of the plan at year end and multiplying the fund's expense ratio by the plan assets in that fund. For plan A, we came up with a total of $195,610, or about 1.18% of plan assets. Plan B calculated out to $114,324, or about 0.69% of plan assets. Remember that Plan A pays no direct costs – the recordkeeper, advisor, and trustee all get paid from the fund held by the plan. Therefore, we need to add in the $44,000 that Plan B is paying in direct costs to get an apples-to-apples comparison. In summary, the two plans look like this:

PLAN A

PLAN B

Active Participants

119

442

Participants with account balances

120

400

Assets

$16,500,000

$16,500,000

Total Direct Payments

$0

$43,841

Total Mutual Fund Expenses

$194,710

$114,324

Total Plan expenses

$194,710

$158,165

Plan Expense as % of Assets

1.18%

0.96%

So – here it comes: You Make the Call!

In this case, we believe it is clear that Plan A is overpaying for services, even though it is a ‘FREE' plan. In our benchmarking studies, we typically seek out 10 or more plans with similar characteristics in order to get a better feel for what plans are paying, but to pay an extra $37,000 annually (about 0.22%) for almost 300 fewer participants doesn't seem reasonable to us. Of course, the devil is in the details, and it is important to know what you are paying each of the service providers in a plan, but that is for another posting.

We can help you benchmark your plan against other, similar plans and help you determine whether or not you are paying ‘reasonable' fees. Contact us today.