Financial Opinion and Insights

Sticker Shock May Be Coming for Retirement Plan Participants

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Retirement plan participants will soon find out how much they’re really paying for their retirement plan; but, there’s more to the story.

While I have faith that many service providers will go to great lengths to find a way to make the disclosures confusing – there is a lot of money at stake – some will be more transparent.  Either way, it won’t be long before word gets out on what to look for; after all, people do talk to each other and it won’t be long before someone gets it.

Here’s an oversimplified but excellent example:

There are three basic functions to running a retirement plan.  In no particular order, they are: 

  1. Investment advisory and management –  The advisor to the plan and the investment managers, in most cases mutual fund companies.
  2. Recordkeeping – keeping track of participant accounting
  3. Administration – filing the appropriate IRS forms and conducting testing, etc.

Often, usually in ‘bundled’ solutions, all three are paid from a bundled fee to a package provider based on assets under management in the plan.   Why a package provider – and the additional compensation required for them – is necessary, I haven’t figured out yet.

I can understand any entity having an impact on investment (and investor) performance having compensation tied to asset value; that’s shouldn’t be a potential problem.  The problem will likely come when plan participants begin thinking about – or someone tells them – about #2 and #3.

Recordkeeping and administration are ministerial activities.  They’re administrative functions that have no impact on, or connection to, the investment, or investor’s, performance.  

Think about it:   If two companies each have 100 employees, it costs just as much to file a form or credit a deposit for a participant in a $3M plan as it does in a $15M plan.  Why should the $15M plan pay five times as much for the same service?   

How about two participants in the same plan?  It wouldn’t be surprising to find them comparing statements only to find out that one is paying twice as much as another for the same administrative function – one that has nothing to do with their investments.

That’s when they’ll start knocking on the door of the CFO or the HR director asking, “Why am I paying twice what she is simply to process a withdrawal?”

Hamina, hamina, hamina…..

“…. and I have another question…..”

Plan sponsor fiduciaries will have to be ready with the right answers.



Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

January 24, 2012 at 8:00 am