Most 401(k) and 403(b) plan fees, especially for plan advisers and record keepers, are upside down. Their fees are based on plan assets, while their costs are based on activity and the number of participants. … Advisers and providers that don’t adjust will be left behind.”
Fred Barstein, Founder & CEO of The Retirement Advisor University and consulting editor at Investment News
“Plan sponsors are more knowledgeable than participants but, given that over 92% of defined contribution plans have less than $5 million in assets and have no full-time employee with investment expertise responsible solely for the plan, an overwhelming majority of sponsors rely upon providers for turnkey solutions to plan needs. These providers largely control the flow of information to sponsors and (with the consent of the sponsor) are responsible for communications to participants. Not surprising, providers of services to plans have taken advantage of their “informational advantage” and the inability of sponsors and participants to commit time to scrutinizing economic arrangements between providers and plans.
Providers have prospered even as participants have suffered mediocre results. Sponsors, freed of liability related to these plans, have little incentive to intervene.
As a result of lack of transparency regarding questionable industry practices, the market for defined contribution retirement plan service providers, including record-keepers and investment managers, remains uncompetitive despite a large number of vendors and plan sponsors. Excessive fees and poor performance are commonplace. Yet providers maintain the industry is not to blame for these unfortunate results. Industry solutions to problematic performance (such as target date funds and personalized financial advice) inevitably involve heaping even greater costs onto investors, further reducing the likelihood of satisfactory net performance. Dissatisfaction with defined contribution plans has grown as evidence of wrongdoing has mounted (and the markets have faltered) and is at an all-time high.”
Edward Siedle, former SEC attorney, former Legal Counsel and Director of Compliance to Putnam Investments
The National Association of Financial Advisors (NAPFA) has long championed the importance of commission-free financial and investment advice. The media has recognized their contribution in exposing unethical practices fostered by commission-based compensation. Now, however, most stockbrokers and fee-only advisors (including NAPFA members) charge fees based on AUM. In terms of compensation, the two types of advisers have become indistinguishable. As a pioneer and current member of NAPFA, I believe that advisers who charge AUM fees fall short of what should be expected of true fiduciaries.
Bert Whitehead, the President of Cambridge Connection Inc., Founder of the Alliance of Cambridge Advisors (now the Alliance of Comprehensive Planners), and the author of “Why Smart People Do Stupid Things with Money
