A Minnesota financial advisor blogs about potential double dipping by 401k record keepers and advisors. With the new DOL conflict of interest rules, providers will be under greater scrutiny. Should you be concerned? Would you know how to answer the question: “Are 401k Service Providers Double Dipping?”
Fees charged by providers and advisors in defined contribution (DC) plans like 401ks can be difficult and sometimes impossible to decipher due to revenue sharing and multiple share classes. At a recent TPSU program in Portland, less than one-third of plans sponsors indicated that they really knew what their providers and advisors were being paid when polled. Uncovering conflicts can be even more difficult.
Here are some examples:
The record keeper offers proprietary funds and, for smaller plans, may require a certain percentage. For those with target date funds (TDFs), the issue is more difficult as there is generally only one suite offered. That record keeper is getting paid twice to manage money and provide administrative services. Anything wrong? Not necessarily but should there be a discount especially if the service provider is paying revenue sharing to itself? Are there better options from non-proprietary funds edged out? At the very least, independent due diligence of proprietary funds is required.
A payroll provider offers a client access to their 401k services. Notorious for having the highest client turnover rate, the client decides not to use their 401k services any longer and finds that payroll fees are increased because they got a discount for bundled services. Except there was no discount on payroll when the client signed up for the 401k.
Banks may offer better credit terms if clients use their 401k services which could be a violation of the sole benefit rule. Either way, the bank makes money from the DC plan and the line of credit. Same company.
More advisors are offering custom managed portfolios and TDFs. Along with their plan advisory fee, they may also get paid on the professionally managed investment. And even if the advisor does not get paid, their firm does. How do they monitor themselves? How likely are they to fire themselves or their firm?
There’s a difference between what a company pays directly to a vendor and what they agree to allow to be paid out of plan assets. Mixing those two can be problematic. Though not always a problem, the DOL rule will increase scrutiny not just by regulators but also by attorneys smelling blood in the DC waters.
