Plan Fees – The Four P’s. Forbes’ writer and 401(k) Fridays Podcast host Rick Unser recently penned an article titled “What If Your Fee Focus Is Hurting Your 401(k) Plan?” Hmm, can focusing on fees actually cause harm to your retirement plan and participants? Well, yes, if you’re laser-focused on getting the lowest fees possible. That said, sometimes the lowest-cost investment options aren’t necessarily the best.
Unser explains why plan sponsors should pay attention to what he calls the four Ps of fees: Proprietary, Prospects, Passive, and Profit. Here’s how he breaks them down:
Proprietary: Your recordkeeper may be pushing their in-house, or proprietary funds, touting their “cost-savings” or their intimate knowledge of these investment options. But before you sign on the dotted line, hold up — are you doing what’s best for your participants, or are you thinking only about saving a few basis points on your recordkeeping fees? If the funds on your investment menu aren’t going to reasonably help your participants reach their desired retirement goals, they are likely not worth the cost savings. A stitch in time and all that…
Prospects: Beyond investment funds, recordkeepers sell other financial products and services. What Unser calls “natural events,” such as a distribution from the plan, may be opportunities for your recordkeeper to turn your employees into clients outside of your plan. However, as he points out, not all providers are required to act in your employees’ best interests. If you’ve already determined which of your recordkeepers’ products and services are appropriate for your employee population, you’re golden. If not, there’s no better time than the present to ask. In addition, make sure that you’re comfortable with garnering lower recordkeeping fees in exchange for what essentially amounts to unfettered access to your employees.
Passive: In recent years, the trend has been for plan sponsors to move to passively managed index funds in their retirement plans to keep investment costs in check. But before you make the switch to passive, consider the risk profiles of the strategies you’re replacing — even more relevant if you’re eyeing passively managed target date funds. As Unser points out, if the bull market loses steam, passive funds may still be a cheaper option, but their performance benefits may not be as appealing.
Profit: In Unser’s words “… in response to the current hyper-competitive fee environment and corporate pressures to grow revenue, firms have gotten creative and combined some or all of the elements mentioned above to construct attractive “low cost” offers to entice employers who are looking to reduce 401(k) fees… be sure you understand their motivation for being in the workplace retirement plan business and where they can make money. That perspective will go a long way to help you make well-informed decisions that in turn should align expectations and benefit your plan and participants.”
So to sum up, before switching providers or investment options to lower your plan fees, be sure to consider the four Ps. There’s more to effectively managing your plan than striving for rock-bottom fees. At the end of the day, if it doesn’t serve your participants’ best interests — and a lot of these decisions don’t if lower fees are the sole objective — then it’s worth taking a breath and thinking twice before taking the plunge.
