When evaluating or benchmarking retirement plan advisers, it is important to know how they get paid. Plan sponsors may see terms like “fee-only” adviser or “fee-based” adviser and not know what exactly they mean.
The difference between fee-only and fee-based advisers is that fee-only advisers only get one type of fee that is paid either by the plan, plan sponsor or participant, says Josh Sailar, partner at Blue Zone Wealth Advisors. The fee is either a percentage of assets under management (AUM) or a flat fee. “The fee is very transparent and listed very clearly in agreements between the adviser and plan sponsors or participants,” he says.
A fee-based adviser gets more than one type of fee. “He could be taking a percentage of AUM or a flat fee, but he also could be getting compensated from other avenues,” Sailar says. “The main additional fee type in retirement plans is a 12b-1 fee, which is a sales commission paid annually for using specific investment types or products from a specific investment company.” He explains that 12b-1 fees vary based on the funds used. Investment companies charge an expense ratio for funds used and pay a part of what they collect to fee-based advisers for recommending the funds.
Tom Burmeister, vice president of financial planning at Advicent, says plan sponsors could also think of fee-only advisers as only earning money through fees clients pay. He says fee-only advisers most commonly charge a percentage-of-assets fee. They could get performance-based fees as well. If they get money from any other entity, they are not fee-only advisers, he says.
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Fee-based advisers get fees from clients, but they also make money in other ways, Burmeister explains. They could get brokerage commissions if they are acting as a broker/dealer (B/D), insurance commissions or commissions from mutual funds. Their fees could also include revenue sharing from mutual fund companies or retirement plan recordkeepers and even finder’s fees. He says finder’s fees are paid for bringing plan sponsors to a particular recordkeeper.
It’s these indirect payments—revenue sharing or finder’s fees—that are causing some plan sponsors to look at conflicts of interest, Burmeister says. “I have seen research that’s indicated that plan sponsors are increasingly scrutinizing fees and asking for more transparency,” he says. “Many that have been complacent are now benchmarking fees to make sure they are paying a competitive rate, and some are making a transition to fee-only advisers.”
Sailar says there’s more of a chance for a conflict of interest with a fee-based adviser. “It’s an inherent moral hazard,” he says. “The mutual funds these advisers recommend are not necessarily bad—it’s just that the adviser is not going to have an interest in looking elsewhere, so the funds might not necessarily be the best funds for the plan.”
Burmeister says it is possible that a conflict of interest could come up with a fee-only adviser, but, in this case, if there are any potential conflicts, or if an adviser is shifting from fee-only to fee-based compensation, that has to be documented and signed by the client and the adviser. “This is foundational to being a fiduciary,” he says. “Plan sponsors can only get fiduciary status from a fee-only, not a fee-based adviser.”
Some retirement plan litigation has included claims that asset-based fees are unfair, but this is usually related to recordkeeping charges, not adviser fees. Plaintiffs in these suits argue that no more work is done as assets in the plan increase, so an asset-based fee is not justified.
Sailar says since the advisory industry has an asset-based mindset, an adviser might even think about AUM when setting a flat fee. He also says some clients understand asset-based fees better than flat fees and vice versa. Sailar argues that even flat fees increase with inflation—just like a salary increases—“so I don’t think there’s anything inherently wrong [with an asset-based fee] or a conflict of interest, as long as the fees are disclosed.”
He adds, “When you think about it, part of a retirement plan adviser’s job is to get participants to enroll in the plan and save more so they can improve their retirement readiness. That’s where the value comes from. And, if advisers can cut costs in other ways to save participants money, asset-based fees wouldn’t be a problem.”
Burmeister says asset-based fee fairness depends on how active advisers are. “More plan sponsors are looking for advisers who spend time with participants. If participants are getting the benefit of a responsible and proactive adviser working with them, there’s an argument to be made that the adviser deserves to be paid based on the assets growing,” he says. “If adviser is more hands off—just doing broad investment selection and things are more on autopilot—I could see the argument that there’s not a lot to be compensated for if assets grow.”
Across the industry, asset-based fees are going to be the primary way to charge for investment advice for a while, Burmeister says. However, he says he is seeing more fee models introduced, such as hourly or plan-based compensation.
Sailar says he would recommend that plan sponsors use fee-only advisers. “I can’t find a valid reason, especially in retirement plans where there’s a long time horizon, to pay more for funds,” he says. “There are so many low-cost products out there—it’s not rocket science—so why get overpaid to do this?”
Sailar adds that he thinks larger companies that can afford to do so might want to consider hiring a fee-only adviser who charges a flat fee to do one-on-one retirement planning with participants. “Not overly specific retirement planning, but planning so that participants understand the pieces of the puzzle,” he says. “That’s the value add going forward. I think we will see more of that and will see more people with appropriate savings levels.”
“In general, plan sponsors are better off with fee-only advisers since there is less chance for conflicts,” Burmeister says. “There are good fee-based advisers, but a fiduciary approach is the best way to make sure adviser recommendations are aligned with the plan’s and participants’ best interests.”
He adds that studies show that plans offer better participant outcomes if advisers spend time with participants. Participants will know more about how to save and invest. Advisers can also provide administrative help with forms, procedures or disclosures, and they can be there to answer questions or help solve problems.
Burmeister says having someone experienced, with knowledge about the Employee Retirement Income Security Act (ERISA), is beneficial. There are some specific designations advisers can earn related to employer-sponsored retirement plans that are indicators of knowledge, he adds, such as Qualified Plan Financial Consultant (QPFC), Qualified Plan Fiduciary Advisor (QPFA) and Chartered Retirement Plan Specialist (CRPS), to name a few. “These are things to keep an eye out for when evaluating advisers,” Burmeister says.
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