Just because a company sponsoring a defined contribution (DC) plan may not write a check to their plan advisor does not mean that they are working for free. There are many ways that an advisor gets paid for providing service. The only improper arrangement is when the company does not know exactly how much. Not only is that situation a bad business practice, it may be a breach of fiduciary responsibility under ERISA.
According to the 2017 TPSU/NAPA Plan Sponsor Survey, there four major ways that advisors are paid for their services including:
- 43% – Included within plan expenses or bundled
- 27% – As a percentage of plan assets or fee based
- 21% – -Paid directly by the plan
- 14% – Flat fee
For both smaller and larger plans, bundled payments are the most popular form of payment but plans with more than $50 million in assets are more likely to compensate their advisor directly (34%) and by flat fee (22%) than smaller plans.
Overall levels of satisfaction and value for the dollar with plan advisors are not affected by the forms of compensation.
Paying a fiduciary out of plan assets is a per se prohibited transaction under ERISA but there are exemptions which include that the compensation is reasonable and level meaning that no matter which investment is recommended, the advisor’s compensation does not vary.
Which is why the DOL conflict of interest rule is so important. By lowering the bar on what actions will make an advisor a fiduciary, the compensation of a greater percentage of advisors will have to be level. And though an advisor who is a fiduciary not be paid legally will face consequences so might the plan sponsor who hired them.
So if a plan’s advisor’s fee is bundled within plan expenses, obviously the most difficult to determine and also the most popular form of compensation, plan sponsors would be well advised to determine if their advisor would be considered a fiduciary under the DOL conflict of interest rule is being compensated properly.
