What Do Cars and Retirement Plans Have In Common?

I think it’s a safe bet to say we’ve all paid a lot more attention to retirement plan fees in the wake of the new DOL (Department of Labor) disclosure requirements. This is true for 401(k)/403(b) plans and beyond. Fortunately (or unfortunately) we can’t avoid the topic!

It’s likely no one pays more attention than the plan fiduciary. After all—it’s their job to work with the service provider and financial professional to make sure the fees paid by the plan are “reasonable.” But what exactly does “reasonable” mean?

While vague terms like this can seem to add to a plan fiduciary’s challenge, it’s actually pretty simple to understand. “Reasonable” doesn’t mean as low as possible.  “Reasonable” means fees should be based on the services received in return.

To help gauge this, consider the services needed to help meet plan goals and objectives. Services for 401(k)/403(b) plans range from simple to highly complex. Simple, or low touch service from a service provider, should generally correlate with lower fees. More complex arrangements probably come with higher fees. But fees are just one part of the equation, and low cost isn’t always the best choice.

So…what does all this have to do with cars?

HZ1226 CAR2

Start by thinking about what services may be appropriate to receive for a given fee. For comparison purposes, it’s actually a lot like buying a new car. Are you content with an economy model knowing it has the basic functions? Or, is it important to you to have all the conveniences available on the market, and you’ll pay a premium to get them?

The financial professional can help determine which model best meets the needs of the plan, the plan sponsor and their participants:

1.  The economy (low touch)

You’ve got everything you need to keep an annuity or mutual fund account running, but few bells and whistles. Typically includes:

  • Processing plan contributions, transfers and distributions
  • Generating automated reporting to the plan sponsor, including Form 5500 preparation
  • Meeting with the plan sponsor to conduct a periodic review, and providing additional phone support to answer administrative questions
  • Providing cookie cutter participant communications aimed toward saving and distribution, with additional support often offered through an 800 number

2.  The mid-sized sedan (moderate touch)

A step up from the economy, your mid-sized sedan offers some conveniences generally for a little bit more money.

Typically includes everything the economy does, plus:

  • Additional personalized plan sponsor meetings and support tailored to the needs of the plan sponsor
  • More extensive participant education resources, including help with planning (but no individualized approach)
  • Phone support available to help with questions beyond administrative and processing

3.  The luxury model (high touch)

This model comes with all the bells and whistles, generally at the highest price.

Typically includes everything listed above, plus:

  • Detailed plan design consulting tailored to the needs of the plan sponsor and participants
  • Detailed plan analysis, including plan utilization reports and progress reports to help ensure objectives are being met.
  • Individualized participant support with a focus on becoming more “retirement ready”
  • More extensive administrative support, including audit preparation

Making sense of it all

It’s important that the plan fiduciary and financial professional work together to determine which model best helps meet the plan needs, whether the model is functioning to their satisfaction (e.g., are the services being provided competently?), and if the fees are reasonable in light of the model and functionality.

The car model analogy provides a simple framework to help start that conversation.

In addition, this checklist can help serve as a guide for how to establish a documented monitoring process to fit the specific needs of a plan.

Update: Attorney Ary Rosenbaum also discusses why retirement plan sponsors shouldn’t pick the “cheapest” plan in a recent article at http://www.jdsupra.com.

Be sure to check out the next post in this series. I’ll help you take this one step further by digging into participant education.

So…have you taken the time to review plan fees for reasonableness? What challenges or opportunities have come from it? Let’s chat in the comments section…

In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. Follow me on Twitter: @1aaronfriedman1.

Click here to follow my Tax Exempt blog

 

Affiliation Disclosures

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company.  Securities are offered through Princor Financial Services Corporation, 1-800-547-7754, member SIPC and/or independent broker dealers.  Securities sold by a Princor® Registered Representative are offered through Princor.  Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

© 2012 Principal Financial Services, Inc.

HZ1203 – t12102403vu

  • Ted Stein

    Thanks Aaron

    This analogy will make it easier for me to explain to my clients the need to talk to their TPA and exactly what type of services they are receiving. And possibly how it may effect their tax obligations now and in the future.

    • Aaron Friedman, National Practice Leader – Tax-Exempt, the Principal Financial Group, Princor Registered Representative

      Ted, I’m pleased that you found the post useful.

    • http://www.facebook.com/profile.php?id=100003407116215 Halili

      Put into your 401(k) the minimum amnuot necessary to collect the maximum firm contribution. That’s free money they’re giving you.Next, get a ROTH IRA and max it out every year. Tax free forever. That’s free money too.If you can do more, then go back to your 401(k) and max that out to the legal limit.If you can still do even more, then consider other options.Take advantage of all the free money you can.

      • Aaron Friedman, National Practice Leader – Tax-Exempt, the Principal Financial Group, Princor Registered Representative

        Thank you for your comment, Halili.

        While I applaud your enthusiasm, there are some clarifications that are necessary. First, I agree that it is prudent for participants to maximize any match from the plan sponsor, but that isn’t free money. It’s money that plan sponsors are willing to provide as incentive for the participant to save for retirement and is part of the employee benefits cost of the plan sponsor. An employee benefit that should certainly be valued by the participant. Nothing is free. In addition, the Roth IRA is not tax free, and is certainly not free money. Taxes are paid on the contributions in the year that they are made. A study this year by the Center for Retirement Research at Boston College (“What is the tax advantage of 401(k)s”, February 2012 Number 12-4) shows on average the tax benefits of current deferral and Roth contributions are equivalent. The truth is that the difference between benefits to Roth versus regular tax deferred deferrals will depend on the facts and circumstances surrounding each individual participant. Individuals should consult with qualified tax advisors to determine what is best for them.

  • http://www.pension-resources.com Jason C. Roberts, Esq.

    Great approach and effectiveconversation starter..I’ll be looking forward to the next installment. Thanks for sending.

    • Aaron Friedman, National Practice Leader – Tax-Exempt, the Principal Financial Group, Princor Registered Representative

      Thanks, Jason