There are two questions on the minds of most Plan Sponsors, questions that you’ve probably wondered about if you manage the retirement plan at your office, but questions that maybe you didn’t know that you could ask (or didn’t know were legal to ask). We’ll add new questions in the coming weeks.
The first question may have seemed absurd during the pandemic, but markets are beginning to rebound nicely, which means your advisor is probably being paid handsomely.
First Question – WHY should you pay your advisor more just because the market goes up?
If you’ve agreed to pay the advisor a percentage of plan assets … you pay more as the plan grows. But why? I know a number of ERISA attorneys who have pondered this very question, particularly because their fees are an hourly cost indeterminate of the size of the plan. (A larger plan with greater complexity might generate more hours of work, translating into more revenue for the attorney … but the attorney does not simply charge more because the plan grows in size.)
why do some advisors charge more when the plan grows? in the “Dark Ages” most advisors charged commissions. Today few 401k specialists still charge commission … but many who have moved away from commission replaced it with an asset-based fee, not a flat fee.
I know, it almost seems illegal or sacrilegious for me to ask the question. Scandalous even. And I’ll probably get kicked out of the “Advisor Country Club” or have my membership revoked in the “Chartered Life Club.” But why wouldn’t you simply pay your advisor a flat fee? Does his or her work increase with the increased assets? Not substantially. If you hire twice as many employees the work might be more demanding, but if your assets grow without increasing your employee count your plan has actually become more cost efficient and should be less money.
SPOILER ALERT: The primary determination of cost is the Average Account Balance, so as assets increase the cost should decrease unless the employee count also increases.
Second Question: WHY would you pay an advisor who won’t “get their hands dirty” with participant meetings?
It seems like you have to deal with one of two extremes. Either you have advisors lining up at the door to speak with your participants because they see them as a sales opportunity. Or you have advisors who only want to meet with the Retirement Plan Committee in the Board Room each quarter. They won’t talk to your employees at all. Ironically, most of the Top Flight Advisors who really specialize in retirement plans take the second approach, and if you had to choose one or the other you’d definitely choose a robust “Board Room Approach” over turning your education meetings into sales meetings …
But why does it have to be one of those two extremes?
Serve the TRUSTEES of the plan (the employer) but ignore the plan participants? That seems odd … particularly because ERISA demands that we operate exclusively in the best interest of plan participants.
Or serve the EMPLOYEES of the company and ignore the trustees and the prohibited transactions against turning the educations meetings into sales meetings? That’s super dangerous and places your company at risk.
But why does it have to be either/or … one or the other?
WHY?
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