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Company Moves to Flat Fee Advisor for their 401k Plan


Originally publish October, 2016 – Can a flat fee advisor arrangement be the better mousetrap?

At a TPSU program conducted at UC Irvine by founding Adjunct Lecturer John Spach from NFP, the controller of a 75-person company sponsoring a 401k plan explains their move to flat-fee arrangement with their plan advisor.

Most defined contribution (DC) providers like advisors, record keepers and TPAs charge a fee based on the percentage of assets in the plan which many experts are starting to question especially considering the new DOL conflict of interest rule. Costs are generally based on the number of people in the plan and the services provided yet the fees are based on the assets in the plan. Should an advisor charge 10x for a 50-person plan with $3 million that gets the exact same services as a 50-person plan with $300,000? Some may argue that there is more liability but is that worth a 10x premium?

The controller at the SoCal 401k plan started a search at the request of senior management of all providers including their advisor and record keeper and, as a result, was introduced to the world of flat fee advisors. Not only did this type of arrangement seem fair similar to what a company might pay their attorney or CPA it also brought other benefits.

Flat fees eliminated one the justifications for revenue share or fees imbedded in the cost of the investments sometimes used to pay the advisor. With a more transparent arrangement and no revenue sharing funds, the result was more trust and confidence by employees. It also eliminates fairness issues between participants investing in index funds which typically have no or low revenue sharing and those that invest in active funds that normally carry higher costs. Though there is nothing inherently wrong with revenue sharing, it makes it more difficult to understand who gets paid what and raises uncomfortable questions that are completely unnecessary.

In addition to moving to a flat fee arrangement with their plan advisor, the plan also delegated selection of investments to the advisor under section 3(38). Though they still have to monitor the activities of the 3(38) advisor, they are relieved of the duties and the liabilities of selecting and monitoring the investments.

Wise plan and worth considering for others.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein

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