Getting to the Bottom Line on Plan Fees

July 5, 2006 ( - Chicago - "A lot of what advisors come up with is not always helpful to the plan sponsors," said Edward Lynch, PRP, Senior Vice President, Investment Group, Dietz & Lynch Financial Strategies and a panelist at PLANSPONSOR's Plan Designs 2006 conference in Chicago last week.

Lynch was speaking to the fact that plan sponsors are often offered – and pay for – products that they may not even need. Moreover, since fees are often bundled in today’s 401(k) world, plan sponsors sometimes have to make a special effort to get the costs for those services delineated.

“Nothing is free. You are paying for it whether it is being disclosed or not,” Lynch said, noting that it is often difficult to get to the bottom line of plan fees, particularly for smaller and mid-size plans. He says that bundled fees need to be broken down to unearth the hidden fees.

Lynch offered attendees a 4-step process that would help in demystifying how much plan sponsors pay for the services they get:

  • Ask impolite questions.   Lynch suggested that plan sponsors ask advisors how much time they spend on your plan each year – and, assuming they charge an annual fee, convert that into an hourly rate. “Then,” Lynch recommends, “ask them if they think they are worth $1000 an hour.”
  • Ask detailed, specific questions.
  • Establish the standards that you will use to evaluate their services and ask them what data they will provide so that you can do so.
  • Establish the true market value of the services you are buying – Lynch said that going in with numbers and knowledge about what is fair-value will “give sponsors leverage for discussion.”

Lynch also said it is not smart to make choices in plan providers based on access to investment platforms because such advantages even out over time.
  He argued that “too many smart people are looking at the same data … you can’t beat anyone, you can only capitalize on their mistakes.”

One suggestion Lynch made about what to put in an Investment Policy Statement — a plan for qualified retirement plans that details the procedure fiduciaries will use for investment selection and evaluation — with regard to fees is a requirement that there be a cap on services, meaning that all excess revenue would go back into the plan.