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Am I paying my 401k financial advisor too much?

I am a small business owner with 7 employees. Currently my pooled 401k has a value of $700,000. I am charged by my financial advisor: 1.5% on the first $250,000 1.25% on the second $250,000 1% on the remaining $200,00.

My latest statement from him shows a fee of approx. $2200 for the 1st Qtr of 2015. It sure seems high to me. Am I paying too much? What about paying 1% on all the value once it crosses $500,000? Any insight into the industry's common practice's here will be much appreciated! (I also pay administrative fees to another company.)

Apr 20, 2015 by Sheila in  |  Flag
6 Answers  |  9 Followers
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Hello Sheila,

I agree with everything that Mike has stated above but I will elaborate on my experience in dealing with plans of your size and scale. Most 401k plans under $1,000,000 in assets typically have advisor costs ranging between .25 - .75bps which are usually built into or thrown on top of the fund cost your employees pay. It is important to keep in mind that the fee you pay your advisor is not for investment advice like you would have with a investment advisor or planner, the advice is strictly provided for fund selection, plan design, employee education, and administration assistance. Meaning if your employees make bad investment decisions the advisor is not liable unless the funds he/she recommended to be in the plan were not suitable for retirement plans. The fee you are paying is more inline with personal advisory costs and is far too high for ERISA governed 401(k) plans.

I will confidently say that the fee you are paying is one of the highest I have seen and recommend you talking to your advisor or other fiduciary advisors to get that fee lowered. If I sponsored a 700k plan with 7 employees I would not pay more than .50bps annually, you will find that many adivsors will agree and be more than happy to do business with you on those terms.

Please feel free to reach out if you have any questions.

Best regards,

Curtis E. Hollowell

1 Comment   |  Flag   |  Apr 20, 2015
Sheila

Thank you to both of you, Mr Smithwick and Mr. Hollowell.

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Flag |  Apr 20, 2015

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Sheila, Kudos to you for examining your plan and trying to understand the series of expenses. The advice both Mr. Reid and Mr. Hollowell provided is solid based on our experience. We recently reviewed a $1.8mil plan for a local non-profit with 30 employees. Their advisor is charging them .80 and their total plan expenses are 1.5%. If they decide to move forward with us, we'll be able save them thousands a year in fees and provide their team with much better service. Best of luck!

Comment   |  Flag   |  Apr 20, 2015

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Sheila,

Great question! Rather than focus exclusively on the financial advisor's fee structure (I'll come to that later), let's start by exploring the total cost of plan sponsorship. Combining your advisory fees, plan administration fees, mutual fund management fees, sales commissions, 12b-1 fees, incremental accounting costs, and any matching contributions from you as an employer, what is the all in cost to provide this benefit to your employees? How are those costs distributed between you as a sponsor and the plan participants? Bear in mind you are a plan participant too.

As a business owner, you certainly understand the benefits of having perqs like a retirement savings plan to promote staff retention. 401(k) plans are frequently regarded as an attractive choice by many small business owners because the contribution limits are higher than other types of small business plans while the required employer contribution to plan participants can be reduced to zero. This advantage however, can be quickly eroded and turn negative as a result of fees paid by the sponsor. In my view, the central question for analysis is whether or not a 401(k) plan is the most cost efficient way to help you achieve your business objectives.

Are you paying your financial advisor too much? That depends. What services does your advisor provide to the company and to individual plan participants? How frequently does the advisor meet with the company and or plan participants? Outside of reporting provided by the plan administrator, what reporting services are provided? Does the advisor act as a Section 3(21) discretionary fiduciary or a Section 3(21) non-discretionary fiduciary. Does the advisor also act as a Section 3(28) fiduciary? The answers to these questions will certainly influence the advisor's fee.

I'd encourage you to approach your current advisor and frame your concerns around the question of whether or not you have the optimal plan in place to help meet your business (and perhaps personal) objectives. I think you will find the vast majority of practitioners will welcome this kind of conversation. In the unlikely event your's is put off or evasive, you might want to consider shopping around.

Good Luck,

Mike Reid

Comment   |  Flag   |  Apr 20, 2015

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ERISA, one of the main laws that govern qualified retirement plans, dictates that the plan may not pay any more than "reasonable" compensation for services performed. Further, the services must be necessary. 1) Talk to your advisor about what he is doing for your plan and tell him to BE SPECFIC and give estimates of the hours expended. 2) Talk to a fee-only retirement plan specialist like myself and have him help you on this. Don't talk to anyone that does not have several years experience and work with 10 plans at a minimum. Ideally, he should have an AIF and/or CRPS designation. As part of this, he will likely help you 3) write a Request for Proposal to get competitive quotes. On the plans I manage I specify that 4) service providers may only charge a flat fee, not a fee based on assets. I suggest you do the same. 5) Look at the other plan fees like fund operating expense ratios (OER), revenue sharing rebates, subTA fees, commissions, recordkeeping and administration and costs for education for you and the participants. If it is with an insurance company there are usually additional fees. Asset-based fees in 401(k) plans are a real problem because what is reasonable today will likely be unreasonable tomorrow as assets and fees grow while the service provided remains the same. Unreasonable fees for services provided is a prohibited transaction under ERISA and as a plan fiduciary you will be personally on the hot seat for making it up to the plan, plus penalties and excise taxes. Don't let an investment manager put you in that position. Do your research with the help of someone experienced in this area.

Comment   |  Flag   |  May 08, 2015 from Charlotte, NC

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Those are all excellent answers but Sheila is referring to a Pooled 401k account and not a participant direct 401k account. In other words, the participants only decide how much to contribute to the plan, not the investment mix. The investment advisor in question manages the combined money of all the employees of the plan into one pooled account just as he would manage your client's IRA money. Typically advisor fees are higher on pooled 401k accounts than on participant directed 401k account since it is the advisor that is actually managing the money of the entire plan.

While the fee seems to be a bit on the high side is important that you get a good feel as to the entire service that the advisor is providing and then compare that to others, look at the investment mix, propensity for risk of the entire portfolio and service to the plan sponsor. A typical fee should run in the 1% range for a 1MM account you are closer to 1.2% by the time you hit 1MM.

Best of luck and congratulations on offering a retirement vehicle to your employees at work.

Carlos

Comment   |  Flag   |  Sep 27, 2016

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Sheila,

I feel that you may be paying too much for service. I would start a procedure called "RFQ or Request for Quote" and have a few independent advisors review your current plan. Ask them to benchmark your current situation and not to just quote you on their services. Ask if they are willing to sign on to the plan as a "Fiduciary". A fiduciary is someone that is legally obliged to act in your best interest and disclose any conflicts of interest. This can take some time, but is a worthwhile endeavor and will benefit your valued employees.

David

2 Comments   |  Flag   |  Apr 21, 2015 from Lititz, PA
Sheila

Thank yo so much!

Flag |  Apr 22, 2015
David G. Niggel, CFP®, ChFC®, AIF®

Anytime. I am here to help.

Flag |  Apr 22, 2015 near Lititz, PA

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