professional practices face fee creep in their retirement ...€¦ · practice retirement plans:...
TRANSCRIPT
Professional Practices Face Fee Creep in Their Retirement Plans
RET IREMENT SERV ICES
Managing a retirement plan for a professional practice can be tough.
Plan designs are often very complex, incorporating both 401(k)/profi t-
sharing and cash balance plan elements, and their highly fl exible
investment structures may allow participants to invest in nontraditional
assets, like limited partnerships and hedge funds. Finding
recordkeepers able to accommodate all of these features is diffi cult.
Knowing what reasonable fees should be for the required services and
how to structure those fees can be even more so.
While a retirement plan’s specifi cs determine the appropriate fee levels, an
emerging trend is changing how those fees are structured. It involves a
departure from past practices to avoid a very real problem in professional
practice retirement plans: “fee creep.”
The problem with asset-based fees.
Historically, most recordkeepers took an asset-based approach to fees.
They charged a “wrap fee,” usually expressed as a percentage (e.g., 0.50%,
1.25%, etc.), against all plan assets except loan balances. Because assets
vary signifi cantly depending on market performance and plan and participant
contributions, sponsors struggled to determine an actual annual fee.
While recordkeepers often preferred an asset-based fee approach, employers
saw a potential problem: As assets increase, fees increase, even if the
recordkeeper’s actual costs do not increase. Participant count primarily drives
recordkeeping expenses—not asset levels. Thus, in professional practices,
where retirement plan assets typically grow at a much faster rate than the
participant count, asset-based fees have become a major problem. Fees
grow at a much faster rate than recordkeeping costs—hence, fee creep.
Professional practices commonly pay 25% to 50% more than they should,
simply due to unchecked asset-based fee growth.
JEFF WALLACEProducer
AUTHOR
What’s the solution?
In an emerging trend, professional practices have begun to require a per-capita approach to recordkeeping
fees. This generally takes the form of a simple dollar-per-head fee (e.g., $200 per participant, per year) or a
hybrid approach that includes a small asset-based element to address estimated cost increases (e.g., $200
per participant, per year, plus 0.01% of plan assets). Either approach goes a long way toward eliminating any
ambiguity around recordkeeping fees. Both approaches can prevent creeping fees from getting too far ahead of
recordkeeping costs.
The real question, of course, is “What are reasonable fees for my plan?” If you’re a professional practice and it
has been more than three years since your last independent plan fee evaluation, you should conduct one soon.
To ensure an accurate representation of reasonable fees for your unique plan features, retain an advisor who has
significant experience working with the small universe of providers that specialize in professional practices. You
want to see accurate bids from vendors that can consistently meet your expectations. With a generalist advisor,
you risk receiving pricing from vendors that are unable to serve complex plans like yours.
It’s ironic that those employers the recordkeepers deem most desirable—professional practices—are
the ones most prone to fee creep. While past approaches created situations where fee ambiguity ran
rampant, by digging your heels in and demanding a different approach, you can begin to eliminate the
problem in your firm.
The communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all necessary components for consideration. You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this communication is not intended to constitute US federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party.
This document contains the proprietary work product of Lockton Financial Advisors, LLC, and Lockton Investment Advisors, LLC, and is provided on a confidential basis. Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited.
Securities offered through Lockton Financial Advisors, LLC, a registered broker-dealer and member of FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.
© 2017 Lockton, Inc. All rights reserved. KC: 29656 lockton.com