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The High Cost of Free

No Free LunchRemember when defined contribution (DC) and 401(k) record keepers use to offer employers a free or no cost retirement plan? Those days are mostly over. With more sophisticated employers and experienced plan advisors as well as enhanced fee disclosure, there’s a hangover effect for plan sponsors looking to pay nothing while trying to get premium service.

The problem lies with so-called revenue sharing. Investment fees paid by participants for mutual funds carry additional expenses above and beyond the cost of managing the money known as 12(b)(1) fees designed to pay sales commissions and marketing fees as well as Sub-TA fees (sub transfer agency) used to offset record keeping and administrative costs. These costs are not obvious to participants or plan sponsors which is why the DOL came out with rules (408(b)(2)) requiring service providers and advisors to spell out in dollars how much they are charging a plan whether received directly or indirectly.

Though not touting “free” any more, overly aggressive sales people have fostered the belief by employers that they can get a “great” DC plan for no out of pocket costs, work or liability – the equivalent of entry into heaven without having to die. It’s about time employers know that nothing in means very little in return. Without a commitment to implement the “Ideal Plan”, some sort of match and hiring a plan advisor who gets paid not only for the services provided but for the quality of those services, making significant improvements on increased income replacement ratios will be impossible.

If employers sponsoring a DC plan were forced to pay expenses directly to their record keeper, TPA and advisor, they would really begin to understand the true cost of running a plan. The system we have now actually costs more with opaque pricing and the inefficiencies of moving money around – and yes, there is no such thing as a “free” plan or even a “great” plan with no costs, liability or work.

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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