Benchmarking Provides a False Sense of Security
Many plan sponsors mistakenly believe that performing a benchmarking study that indicates the reasonableness of their fees compared to other providers also indicates reasonableness based on the level of services their providers are offering. However, these studies tend to exclude the less expensive flat fee-based providers, which if included, would clearly have given a very different impression.
Setting a New Standard
Granted, the least expensive provider is not always best, but in this industry, more expensive asset-based providers may not offer additional services and may actually offer fewer services as part of their standard offering than other less expensive flat fee-based providers. Take Guideline as an example, a firm that is truly changing the industry as explained here. For a mere $39/month (or $99/month for their prime service offering which also includes new comparability profit sharing allowing employers to optimize contributions to certain groups, support for any payroll provider including those outside Guideline’s integrated partners, a dedicated account manager, and priority support allowing employers to receive faster responses) plus $8 per month per participant, Guideline provides seamless payroll integration, record keeping, 3(16) administration fiduciary, and 3(38) investment fiduciary services where they streamline the compliance and fund selection process to the point where employers don’t even have to sign the 5500 form, send out participant notices, manage vesting, eligibility, or loan policies, or approve distributions and hardship withdrawals, and participants can simply choose a customized portfolio consisting of low cost index funds based on their answers to a few questions.
Furthermore, Guideline also allows for companies to choose eligibility requirements, performs profit sharing calculations, provides vesting options, and includes robo-advising and participation and savings rate boosting communications. In addition, Guideline offers full phone, email, and chat support as well as educational drip campaigns to employees who have opted out to encourage participation and provides a full library of articles that cover any 401(k) based question an employee would have that can be accessed at success.guideline.com.
Notable services and features that Guideline does not offer include auto escalation, an open architecture platform, self-directed brokerage accounts, and defined benefit plans, but many of the other lower cost flat fee-based providers do offer these services. While Guideline offers a restricted fund list, most plans offer similar funds anyway, so this limitation may not matter. However, in this inflationary environment, it would be wise for plan sponsors to offer precious metals funds such as gold and silver, which are available through the other flat fee-based providers.
Another Exceptional Provider
Alliance Pension has an especially interesting model which focuses on flat fee pricing, but does not base its pricing directly on the number of participants. Their model has greater precision because it focuses on the amount of time spent, and for this reason, in many instances it can offer significantly more competitive pricing than even other flat fee-based providers because the amount of time required to service a plan with 200 participants, for example, does not actually differ much from a plan with 400 participants. And when you take Alliance Pension’s open architecture platform, high quality record keeping system which is audited by a national accounting firm, custom-designed non-prototype plan documents and forms, low client and employee turnover, and high level of employee expertise demonstrated by each employee’s professional certifications and significant industry experience into account, their value proposition becomes clear.
What Should a Plan Cost?
$2 million in assets and 20 participants
If the plan has basic needs that do not require significant customer service, auto-escalation, an open architecture platform, or self-directed brokerage accounts and there is no need for a defined benefit plan, then this plan should cost $2,388 annually for all record keeping, administration, and custodial services combined. And if the plan requires cross-testing, payroll integration, a dedicated account manager, and priority support, it can obtain all of these features for a mere additional $720 annually. Why these numbers? Because this is what Guideline would charge for record keeping, administration, and custodial services, and given that they also include 3(16) administration fiduciary and 3(38) investment fiduciary and have no set-up fee, it’s hard to justify selecting another provider (with the possible exception of Alliance Pension for the reasons stated above), any of which would be significantly more expensive and not even include the additional fiduciary services noted above as part of their standard pricing.
If an advisor is needed, then a reasonable estimate would be somewhere around $5,000 annually, but of course that depends on how much time the advisor spends – and time should be the primary factor in determining the advisory fee. Yes, the advisor can be justified in charging a bit more for liability purposes if the assets are greater, but not that much more because professor liability insurance isn’t that expensive.
The mutual funds should cost about 0.06% per year on average, which comes out to $1,200 on a $2 million account, so the total annual costs should be somewhere around $9,000.
$2 million in assets and 20 participants with more complex needs
Let’s assume this plan requires features such as auto-escalation and a self-directed brokerage account and that the advisor will have to spend more time. Most custodians charge anywhere from 0.025% to 0.08% of plan assets, so the custodial fee should be between $500 and $1,600. The annual cost of cross-testing should range from about $500 to $700, and the combined cost of administration and record keeping should range from $1,500 to about $6,000.
As for the advisor, let’s assume that the participants are highly engaged and make frequent calls to the advisor, who also does three or four meetings a year. In this case, an annual fee of around $7,500 would be reasonable. And the average cost of the funds should still be about 0.06%. There will also be a small cost to setting up a brokerage account. So a plan of the same size as the first scenario having more complex needs might reasonably cost $12,000 to $15,000 annually.
$5 million in assets and 50 participants with basic needs
Let’s use Guideline as an example again, who in this case would charge a flat annual fee of $5,268 for all record keeping, administration, and custodial services with the additional features noted above still offered for an additional $720 annually. Given the greater asset level, this fee makes even more sense because the costs typically increase so drastically as the assets increase even though the percentage gradually drops.
$5 million in assets and 50 participants with more complex needs
The analysis is similar to scenario two. Since there are more participants, it’s ok to pay a higher advisory fee. And since the assets are greater, then the mutual fund and custodial fees will be slighter higher, but not much higher. The custodial fee should be the same range, so anywhere between $1,250 and $4,000 is reasonable. The combined cost of administration and record keeping including cross-testing and setting up a brokerage account should range anywhere between $3,000 to $9,000. The mutual funds should still cost about 0.06%, which comes out to $3,000. A higher end annual advisory fee would be around $10,000. So somewhere around $17,000 to $24,000 in total costs would be reasonable. Employee Fiduciary, for example, which does offer self-directed brokerage accounts, is the next lowest cost provider, which charges an annual record keeping and administration fee of $1,500 for the first 30 participants and $30 for each additional participant and works with a custodian who charges 0.08%. This firm would be on the lower end of the range above, but may not always be the best fit, which illustrates the value of this extensive flat-fee based provider list offering a wide range of services.
There are endless scenarios, but these four should help convey the idea that the number of participants primarily drives the level of services provided, and for this reason, plan sponsors should pay fees in proportion to the services they receive. Otherwise, they will continue to pay additional fees (and in most cases most of these fees are paid by participants) without receiving any additional services.
Now a reasonable question might be: What do plans typically cost with asset-based fee providers? Let’s go back to the first example, which mentioned a reasonable level of total costs of $9,000, most of which are fixed. Asset-based arrangements typically cost around 1% to $1.5% for plans with $2 million in assets and 20 participants, which converts to $20,000 to $30,000 in actual dollars – and not only will these costs continue to increase without any additional services provided, but these providers don’t even offer any additional services provided beyond what the service providers shown above offer!
To verify this claim, if you are a plan sponsor using a large provider charging asset-based fees to your participants, in addition to delving deeper into the fees and services of Guideline, Alliance Pension, and Employee Fiduciary, try reaching out to other firms like Correll, Pentegra, CUNA Mutual, and Vanguard and perform an in depth comparison with the provider you have.