“Experience without theory is blind, but theory without experience is mere intellectual play.” –Immanuel Kant
As I share what we have built with service providers and plan sponsors across the country, some have said to me that it sounds like a great theory, but traditional benchmarking is working just fine. There is no need to change the current model. And while the current benchmarking practices of comparing a covered service provider’s fees to those of another provider may work for some cases, it does not determine what is reasonable for many plans.
The following is a case study of a plan to which we applied the QPSteno methodology against results from a traditional 401(k) benchmarking tool.
The plan itself was pretty straight forward. Here are some of the particulars:
- About $2,000,000 in assets;
- 34 participants;
- Traditional 401(k) with employer contributions;
- Age weighted/New Comparability, single location, one shift.
Running the plan through traditional 401(k) benchmarking (provided by the B/D) showed that the fees were high. Not off the charts high, but in the upper quartile. But here is where it gets interesting and most benchmarking falls down.
The advisor did not do any fund due diligence. It was a variable annuity contract in which the advisor and plan sponsor chose to offer all of the funds in the product instead of making the fiduciary decision to limit the fund line up. The advisor had no background in qualified plans, so there was no plan design support. The education for the participants consisted of a 20 minute market recap twice a year, and then the advisor hung around for about an hour for questions. Education as it pertained to fund selection was pretty simple; they pushed everyone into the managed account which paid an extra fee to the advisor. Participants were not actively engaged. In fact, the only participants who routinely asked questions were those who had engaged the firm for personal financial planning and wealth management. And those individuals were two of the owners and the Controller.
As a result of our analysis, the advisor was getting paid about $3,000/hour.
Now there are situations where a fee that high might be warranted. However, that is higher than what many cardiothoracic surgeons can make. As this firm didn’t really “do plans” in a meaningful way, it did not have the expertise to command such a rate. He held no qualified plan designations. While he had financial planning credentials, they were not utilized for this plan. The advisor was not engaged in any conversations about fiduciary responsibility, plan design, document interpretation/implementation, or transactions in the plan.
When we talked to the advisor about how he felt about his fee and our analysis, nothing could have prepared us for his answers. His first justification was that it was a long drive. 30 minutes one way. To most of us, that is laughable to the point of being insulting. His second defense (and I really wish I was joking): “But we take donuts.” I like Krispy Kreme, especially when they have just popped out of the fryer and the glaze has not completely set. But these were day olds from the grocery. At this point, my blank stare and gaping mouth caused him to change defense tactics. “We simply took over the contract and the expenses that the old advisor wrote into it.” His defense went from a laughable commute to donuts to “It wasn’t me/I didn’t read the contract.”
Our methodology uncovered what most 401(k) benchmarking services don’t – when a covered service provider is coasting. The true measure of reasonable is not the dollars paid but the dollars paid relative to the service delivered. Unfortunately, the fees didn’t match the service in this case.