Got five minutes? The topic of this blog post is covered in our Fiduciary Five Podcast series hosted by Chuck Hammond of the 401(k) Study Group. The Fiduciary Five Podcast…your fiduciary questions, answered in about five minutes. To listen to the related podcast, click here.
When looking to buy an automobile, consumers are faced with a very simple choice since all cars are built the same way. Each model is comprised of an outer shell, an inner compartment to hold passengers, four wheels and an engine that makes the vehicle go. With that in mind, shouldn’t we always simply buy the model that has the lowest price?
There is a common perception in the retirement plans industry that all plan administration and record keeping service providers offer essentially the same package of services and, therefore, when choosing one for your plan, one should always go with the option that charges the lowest fee. Wrong! Let’s go back to our automobile shopping scenario to find out why.
In reality, when shopping for a new vehicle, we’re not just looking for something that can get us from here to there. We’re looking the safety, entertainment, comfort and convenience features that are most important to us and best fit our needs. The same approach should be used when shopping for a service provider for your retirement plan. For example, an increasing number of employers are concerned with minimizing their fiduciary risk that comes with sponsoring a retirement plan. If they choose a service provider that charges the lowest fees, but does not offer a fiduciary risk mitigation solution, have they found the right fit? Of course not.
Recent years have seen the proliferation of industry jargon, such as “fee compression” and “the race to zero.” This has a tendency to minimize the importance of performing comprehensive evaluations when deciding which administration and record keeping provider is the best fit for a sponsor’s needs. Upon a closer look, one will find that the details within the service models offered by administration and record keeping providers vary greatly. As with the automobile illustration above, the outer shell of these service models tends to look the same with plan administration, annual compliance testing and participant record keeping being staples. However, as when shopping for your new automobile, some companies offer “extras” that are not available elsewhere, which can make their service model the right fit for the customer.
If a plan sponsor wants to remove as much of the fiduciary responsibility as possible from their Plan Trustee, then a service model which only brings an ERISA 3(21) or 3(38) fiduciary solution to the table instead of a Discretionary Trustee will not be the right choice, just as an automobile that doesn’t come with passenger side airbags is not the right choice if you want the maximum crash safety features possible.
In the absence of value, price becomes a concern in any shopping scenario. So, what defines value in a retirement plan service provider? Is there value in a provider that will accept the allocation of fiduciary responsibilities normally assigned to the Plan Trustee instead of a provider that will only accept a few? Is there value in a savings and investment solution that provides retirement success to plan participants at a rate nearly three times the industry average? Is there value in a provider that is consistently recognized for following the industry’s best fiduciary practices?
When you just look at price, you could end up with the Yugo. Instead, consider your needs and find the right value!