Magazine article The CPA Journal

The Price of 'Free' Retirement Plans

Magazine article The CPA Journal

The Price of 'Free' Retirement Plans

Article excerpt


and expand to outside funds. Plan sponsors must ask for this flexibility.

Retirement plan sponsors often believe they are getting their retireanent plan for "free." The author's evaluation of more than 40 retirement plan providers, however, indicates a wide range of "free" plan providers. An extensive database of provider services, features, and costs has been developed through a request for proposal (RFP) process for over 25 different plan sponsors over the last three years. Plan sizes ranged from under $5 million to over $400 million. The survey revealed a number of key dimensions on which plan providers can be evaluated.

Comparing Free Plans

Revenue sharing. Many providers are completely reliant on their array of mutual funds to provide their compensation. The differences in what mutual funds pay in revenue sharing can be staggering. The amount is generally related to the internal expenses of the underlying mutual fund; higher expense-ratio funds generally provide more revenue sharing. If a provider can position higher-cost mutual funds for its client, it means increased revenue sharing for the provider. Therefore, the participant often ends up bearing the cost of mutual fund revenue sharing through higher internal expenses.

Plan profitability varies. Generally, the higher the average participant account balance, the higher the profitability to the provider. Large participant balances allow the plan sponsor to force its provider to utilize lower-expense ratio products and institutional share classes. They also require the provider to improve employee communication or offer something else to improve the plan. In addition, the provider can send the plan sponsor a "rebate" to cover other plan costs, such as consulting, legal fees, or employee communication. However, there cannot be renegotiations with the provider without cost and revenue-sharing quantification. The onus is on the plan sponsor to understand the details.

Commodification of the plan. A common sales pitch used by insurance companies is, "Let us handle your health, life, and disability, and we'll throw the retirement plan in for free." Experience says that the plan usually ends up being expensive rather than free. Retirement plan providers' services and costs vary widely and must be looked at differently than other benefits.

Advisors. Brokerage commissions always make plan costs higher, and should be paid for separately from expert advice. …

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