One of the best ways that you can improve your employer based retirement plan is to decide that you will only pay for much of your plan services on a flat fee basis. This is a really big deal, so get it done!!
Unfortunately many plans bundle their services together and pay them as a percentage of assets or, even if they are not bundled, still pay for their record keeping and advisory services (which I would simply refer to as help for the plan or the employees) as a percentage assets. This is bad policy and unnecessary. Both record keeping and advisory services can be major components of plan costs. However, both of them are also services that can be provided on a time and materials basis. Many record keepers can price out their services, or at least the bulk of their services, on a per participant or a per eligible participant (yes, those are different) basis. Makes sense, right? You pay based upon the number of people in your plan.
Let’s look at an example to see how this might work. Let’s say your plan has $3.5 Million in it, and you pay on a percentage of assets basis for both record keeping and advisory services – in this case I will simply lump them together – .75%. Your total cost would total $26,250. But what if you broke out the services and billed them on a flat fee and one came in at $10,000 and the other at $4,000. That is an annual savings of $12,250. Smart!
Of course, a retort would be: “What if the flat fees came out higher than the percentage of assets? What about that, smart guy?” Well, the reason I am suggesting this is because I think in the vast majority of cases that won’t happen! And if it does, then keep paying on a percentage of assets basis. That is easy enough, right?
It gets worse. The really awful part of this situation is that as the assets grow in the plan over time, which is generally what happens, the plan, and the plan participants keep paying more, and more, and more money for these services. And the additional labor for this work should not grow at the same rate.
Some fees may need to be charged as a percentage of assets. Fund fees and typically a plans’ trust services will be charged as a percentage of assets as well. But those are the only two that should be charged in this manner. While I am not an advocate of this because I believe that using either Vanguard Target Date Funds or Lifestrategy is a great way to get excellent asset allocation, some plans will also offer asset allocation services on a percentage of assets basis too. If so, this fee should not be greater than .25%. And, I should add, the plan sponsor should take a shot at trying to negotiate these on a flat fee basis as well!
By the way, the other contenders for the most important ways to improve plans would be to eliminate all revenue sharing, using index funds, and providing personal guidance to plan participants from a fiduciary. I have addressed those in other posts and will discuss again in the future.