The cost to record keep a 403b or 401k plan is based mostly on the number of participants, not the assets in the plan, yet most plans are priced as a percentage of assets. A larger plan attending a TPSU program held at Loyola University recently moved to a flat fee per participant and we asked one of the Adjunct Lecturers conducting the program, Peter Godfrey from Hightower Fiduciary Plan Advisors, whether this was a trend.
Though the trend to flat fee arrangements is just beginning starting with larger plans, the focus on fees and transparency has grown driven initially by experienced plan advisors and then codified by the DOL in 2012 with new fee disclosure rules (408b2 and 404a5) punctuated by the rash of 401k and 403b lawsuits many based on fees. Though the DOL has been focused on their new fiduciary rule, it’s likely that they will require summary fee disclosure that plan sponsors can understand rather than the complicated 408b2 reports they currently receive.
So should plan consider moving to a flat fee arrangement? Before they do, it important to understand exactly what is being paid and whether it is reasonable after which they can decide how to make those payments. As most plans costs are paid by participants, passing along a flat fee payment may not be fair to smaller accounts just as a flat fee tax do not benefit lower income workers. And record keepers might initially charge a higher overall fee under a flat fee arrangement knowing that pricing will not grow with assets.
So are flat fee arrangements for defined contribution plans growing and is it a best practice? Few plans are moving towards it and Peter Godfrey would not go as far to say it is a best practice though he did stress that understanding fees is key as is determining whether they are reasonable.
