The Big Rip-Off Should Be Ending Soon
Our firm’s consulting group was recently asked to benchmark a company 401k plan. To me, benchmarking a plan is always interesting as you learn a lot about the company as well as its advisor after you really do a deep dive into the plan itself.
In this particular case the plan had about 30m in assets and 325 eligible participants. That equates out to an average participant balance of almost 100k per person which is very good. The investment side did have some performance issues but that is always easy to fix. Plan design was fine.
The big thing that we look for today is plan fees. The DOL turned on the floodlights on plan fees a couple of years ago yet most plan sponsors don’t have a good grasp of this figure and in a way I don’t blame them. The CFO or the benefits director are very busy people and the transparency that both the record keeper and advisor provides the retirement plan committee is almost impossible to decipher.
This particular plan was found to be using investment funds with built in commissions in them. 12b-1 fees is the financial description for these commissions. The commissions totaled about 120k each and every year for this plan. These commissions/12b-1 fees was taken right of the participant balances. The first and biggest question is whether or not 120k in annual commissions is too high or too low. The simple answer is too high. Most plans with these demographics can easily hire an excellent advisory firm for around 20k. It might be a little higher if there is some travel involved. So the plan was paying their advisor about 100k in excess every year.
In summary there are many plans that still use funds that have commissions/12b-1 fees built into them. This is just a big rip-off to the plan participants. A plan sponsor has a fiduciary duty to understand how everyone in the plan is getting paid. There are a number of lawsuits pending where participants are suing their company over this issue. Valued employees have a difficult road as it is to achieve retirement success. Having millions of dollars taken from their plan is certainly not helping them. My hope is that the big rip-off finally ends.
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