PLANSPONSOR - June/July 2020 - 44

EXECUTIVE SUMMARY
What Is Fair
And Reasonable?
Per-participant pricing is the way to go with recordkeeping fees
C
ory Clark, chief marketing officer at Dalbar Inc., postulated
in PLANSPONSOR's April/May issue that an
asset-based fee structure is good for plan participants,
incentivizes service providers and fuels plan success. Central to
his argument is that " a plan participant is not paying for the cost
of the service. What the participant is paying for is results, for
success in securing a retirement income. " Therefore, continues
Mr. Clark, the more successful the plan, the more the service
provider should be rewarded, and an asset-based charge lends
itself to this construct.
We could not disagree more.
What the participant should be paying for is an accurate
statement, a thoughtful fund lineup, robust planning tools, a
user-friendly participant website, unconflicted 800-number
service and so forth. Participants do pay for the cost of the service.
What a participant is saving and investing for is an adequate
retirement income. Both employee and employer contributions
drive successful outcomes more than any other factor.
And what drives contributions? Let's be real: Automatic
enrollment and automatic increases have done more for increasing
participant contributions than any other effort. Likewise, a plan
sponsor can easily increase its plan's default deferral rate-another
of Mr. Clark's proposed " success metrics. " Should a service
provider earn more because of the simple addition of these three
plan features? Of course not. The idea of providing a perpetual
income stream to a service provider who, at most, educates a client
on common plan features doesn't make sense.
Plan assets grow with simple plan design, contributions,
market performance and time, none of which should inflate a
recordkeeper's fees. If we're talking about " securing retirement
income, " a fixed, flat recordkeeping charge is better-suited to
meet that objective. Significant savings will result over the life
of an investment if per-participant fees don't grow with account
size. We've all seen those mathematical examples showing how a
minuscule increase in an asset-based fee results in a significant
decrease to the final account balance.
Plan assets have little to do with the work required to service
a defined contribution (DC) plan. The cost of recordkeeping and
administration is a function of the number of plan participants
and, to a lesser extent, plan complexity, not the amount of assets
in a participant's account. The cost of providing recordkeeping
services to a participant with a $100,000 account balance is the
44 PLANSPONSOR.COM June - July 2020
same as for a participant who has $10,000. How many other
ways are there to say it?
The 2019 Callan Defined Contribution Trends survey highlights
an increase in the use of per-participant fees, noting, " a
per-participant fee continued to be more popular than an assetsbased
fee, and by a much wider margin in 2018. "
To be sure, a per-participant fee could be unreasonable-
e.g., $500 a head for a 100-person plan-and an asset-based
fee could be very reasonable. Smaller plans, with their inability
to spread fixed costs over a larger number of participants, will
certainly " cost " more. But whether or not a fee is reasonable,
or how a fee is allocated to participant accounts, be it pro rata
based on account balances, or per capita, are deeper discussions
for another time.
In a competitive environment, the market drives what service
providers can charge, not how much the plan has in assets. It's
incumbent upon recordkeepers to charge for their services, plus
a reasonable profit margin given the level of skill, effort, value
and risk associated with delivering those services. Fees based on
costs do not provide " more incentive to increase costs " as Mr.
Clark asserts. Rather, thoughtful companies perpetually seek to
reduce costs, as that will make them more competitive for the
next opportunity. This isn't hard.
Plan fiduciaries are duty bound to pay only " reasonable "
fees. It is decidedly unreasonable for a 100-person, $20 million
plan to pay much more than a 100-person $5 million plan. Yet
that's what typically happens with an asset-based fee structure.
Witness the wave of recent 401(k) fee lawsuits. To wit, we're
unaware of any of attorney Jerry Schlicter's excessive fee lawsuits
that has involved per-participant pricing. Lawsuits have virtually
all been about excessive, unnegotiated asset-based fees that were
allowed to increase simply because of market returns. These
lawsuits have successfully reduced recordkeeping fees across all
plan sizes as asset-based fees have been exposed. Let's not push
for reverting back to the practices of a decade ago.
Tom Rouse is a director of NWPS, a full-service recordkeeper
and administrator of retirement and health and welfare
plans. He has an MBA and is a Qualified 401(k) Administrator
(QKA) and a Qualified Plan Financial Consultant (QPFC). He
has served the retirement plan industry for nearly 30 years.
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