Retirement

Retirement Benefits: Getting What You Paid For

Running a retirement benefits plan costs money, from administration fees, fund expenses, consultant fees, managed account fees, and the list goes on. For each item on that list, a plan sponsor can be sued for not properly monitoring the costs to ensure that they are reasonable. Furthermore, sponsors want to make sure they are actually getting the value and service for the costs incurred.

Get the most out of your Retirement Benefits

Investment Expense Comparisons

A peer group comparison of the investment-only expenses is only one part of the total costs of a Defined Contribution (DC) plan. It is also important to be mindful of the peer group. The peer group for a $5 billion DC plan is vastly different than that of a $50 million DC plan. This is easy information for a consultant or provider to gather, and should be delivered on a quarterly basis.

Administration Expenses

Request For Proposals (RFPs) are time consuming, but they nearly always result in a better price, more service, and often both. Don’t let your provider run the plan; they are not the fiduciary. It is important to ask your provider for a detailed fee analysis of all plan fees on an annual basis.

How Are Fees Paid?

Uneven expense arrangements, with fees through revenue sharing, brokerage fees, etc., rather than a purer administrative fee, are under more and more scrutiny. The big question: should a participant who uses a product/service that happens to carry revenue sharing, or generate some fee, pay more for the administration of the plan? We believe the answer is no, and that a level, balanced administrative fee approach is more prudent. Within this context, it’s important to ensure that some participants aren’t subsidizing the plan cost for others by investing in funds with higher revenue sharing.

Are You Getting Good Investment Advice?

Consultants give investment recommendations, conduct quarterly reviews, and monitor their recommendations. Once upon a time, independent information and data about investments was hard to come by; however, with vast amounts of data and analytics tools available on the web, those days are gone.

 

How do you know if your consultant is giving you high-quality advice that is worth the fee? It’s a tough question with no easy answer, but here are a few ideas that could be useful:

  • Captain’s Log: If a fund is being replaced for performance reasons, continue to keep track of that fund and compare the future performance of the two funds. You can even request that an appendix be added to the quarterly performance book with all the replaced funds and their relevant statistics.
  • Mirror Process: When you receive a recommendation, focus on how the recommendation was derived, i.e., what the process was that led to a particular fund recommendation. Many consultants will provide a “map” of each round of analysis, showing the total number of funds that were eliminated based upon each of their criteria. Ask yourself if there is anything innovative, proprietary, or unique that makes this process valuable.
  • The Big Picture: It’s easy for investment consultants to dazzle plan sponsors with fancy statistics about investment performance, but how does it all fit into the big picture? Sure, creating alpha of 100 bps in a fund is great, but how much of the assets are actually in the fund? Is the fund suitable for the plan participants? Is it being used appropriately? These are all questions that should be addressed within the greater context of participant outcomes when thinking about plan investments.

 

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David is currently the head of retirement research for Morningstar Investment Management LLC.  In this role, he works to enhance the group’s consulting and investment services and serves as the chair of the Advice Methodologies and Automated Strategies subcommittee, which is the working group responsible for developing and maintaining all methodologies relating to wealth forecasting, general financial planning, automated investment selection, and portfolio assignment for Morningstar Investment Management LLC. He does research primarily in the areas of financial planning, tax planning, annuities, and retirement. His research has been published in a variety of industry and academic journals and has received a number of awards. He is a frequent speaker at industry conferences and is regularly quoted in the national media.  When David isn’t working, he’s probably either out for a jog or playing with his two kids.

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