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Guest Commentary An Insider's View of 401k FeesBy Jeb Graham CEBS, CIMA® of CapTrust Financial Advisors, an independent consulting/advisory practice focused on the institutional retirement plan market, serving corporate, closely held, non-profit and governmental organizations. You may contact Jeb at 813.218.5008 or jeb.graham@captrustadv.com. It is easy to point fingers at an industry and say fees are high and imply that greedy corporations are making a killing off the common person. Look no further than the pharmaceutical industry. But in the 401k industry, it is an inaccurate claim. The margins in the industry are generally thin. Thin margins are the primary reason for the consolidation of retirement plan industry service providers in the past five years. On the investment consulting side, there are very few firms that specialize in the institutional retirement plan space because the margins are so much narrower than those on the retail investor side. This increased visibility on the issue of fees has likely created work for firms like ours that specialize in 401k fiduciary services. And we appreciate that work. But contrary to what the media would have you believe, most of the plans on which we conduct fee analysis projects are not plagued with excessive fees. Sure, there are always opportunities to negotiate with providers to lower fees a few basis points, but I challenge the notion that fees are the real problem across the board. As someone with experience in analyzing fee structures and revenue sharing arrangements, I believe there are two real issues at hand…and neither one is directly a matter of excessive or hidden fees. And disclosure is really not the problem either. There is plenty of disclosure if you know where to look. In my opinion, the bigger 401k issue, at its core, is no different than the mutual fund scandals, Enron, or any other corporate malfeasance you have read about in the past. I believe that revenue sharing, in of itself, is not the real problem either. Is revenue sharing complex? Absolutely. Is it evil? Hardly. No, the real issue is the conflicts of interest, related to the fees and revenue sharing arrangements, which ultimately may be unfavorable to participants. Did the employees of Enron or Tyco have a problem with 401k fees? I think their problems were beyond that. As an industry insider, I believe that 401k committees and plan participants have a much greater need for increased protection from undisclosed conflicts of interest than they need more disclosure of fees or revenue sharing arrangements. If one is looking for problematic conflicts of interest, investment managers giving advice on their own funds is an easy target. Also ripe with potential conflicts are firms with multiple lines of business, which provide advice to 401k committees in addition to other services. The format of compensation can also be problematic, such as brokers being paid a commission for advice that is believed to be objective. There is just no way to convince me that a conflict of interest can be avoided if a financial product must be sold to compensate the broker for the advice, when that very same brokerage firm derives revenue from trading and custody operations. No wonder these firms don't want to acknowledge that their salespeople are giving advice. Another important consideration in the fee equation is the services being delivered. One problem we continually see in our fee analysis projects is a lack of service benchmarking or investment oversight to ensure that participants are getting value for the fees being charged against their accounts. In my opinion, this is the crux of the fee lawsuits you have read about. It is not that fees were excessive, but rather that the plan fiduciaries on the 401k investment committees did not institute appropriate process or take the necessary steps to itemize the fees or document that services were commensurate with fees being charged. For example, in a recent project we conducted, the 401k plan menu had no funds in the value category. So, while the overall fees were slightly below the industry averages, the participants were not appropriately diversified and had missed out on the better performing asset classes over the past few years. And all the while, a broker was being paid a commission. This plan did not have a fee problem…but it did have a problem. Another example of participants getting shortchanged, that we see consistently, is where the recordkeeping provider is an investment management company that the committee believes is providing investment advice, when in fact this provider has clearly documented that they are not providing advice. This gap in services being delivered results in a lack of the prudent investment oversight at the plan level that is essential to participants getting the most out of the fees being charged against their accounts. In conclusion, there is a real 401k problem. It is just not really what it is made out to be. 401k investment committees and plan participants do need help from legislators, but my guess is that the help given will not be the help needed. Wachovia Securities Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author and are not necessarily those of Wachovia Securities Financial Network or its affiliates. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. It is not intended as legal or tax advice. Neither Wachovia Securities Financial Network or CapTrust Financial Advisors is a legal or tax advisor. Please be sure to consult your CPA or attorney before taking any actions that my have tax consequences. Investment products and services are offered through Wachovia Securities Financial Network, LLC (WSFN), member NASD/SPIC. CapTrust Financial Advisors is a separate entity from WSFN. CapTrust Advisors, LLC is a Registered Investment Advisor with the SEC. CapTrust is not a legal or tax advisor. Please be sure to consult your CPA or attorney before taking any actions that my have tax consequences. Other articles by Jeb Graham: Looking Under the Hood of Your 401k to Understand the Real Costs, Does Your Organization's Retirement Plan Measure Up? and The Importance of Legal Counsel Review. ### 401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise. | ||||
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