Recent court cases clearly show that plan sponsors cannot leverage their DC plan to get better deals on other services, such as health care or corporate credit, from their plan providers; ERISA plans have to be designed for the sole benefit of the participants.
But a much less subtle issue arises when a record keeper offers a better deal on their administrative services if the plan sponsor uses their proprietary funds, especially the TDF as the QDIA.
Recent Callan research shows that larger plans are moving away from proprietary TDFs offered by a record keeper (32% in 2015 vs 70% in 2011). Indeed, best practices dictate that funds and service providers should be selected and monitored on their own merits. It’s also clear that an advisor acting as a fiduciary may not receive variable compensation from the investment options in a plan’s lineup. But is there anything wrong with lowering overall plan expenses by using a record keeper’s proprietary investments?
That depends. What if the plan sponsor pays record keeping and administration fees and their costs are lower when offering proprietary funds? But what about the more common scenario when most, if not all, fees are paid by participants? In that situation, advisors have to look at overall expenses within the fund. A record keeper may offer a discount on revenue sharing fees but the overall expenses of the fund may be higher, especially when comparing active vs. passive funds.
Part of the issue is bundling investments and record keeping — how do you separate them if they are being paid to one source? And how much revenue is the parent company of the record keeper and investment manager really getting by bundling? According to a 2014 Pension Research Council study, only 13.7% of poorly performing prop funds were replaced by DC plans, compared with 25% for others. Coincidence? A recent ICI/Brightscope study shows that 67% of all DC plans offer a record keeper’s proprietary funds, including 79% of plans with $250-$500 million, which have 39% of assets in those funds.
So sometimes it comes down to this: If something doesn’t feel right — even though it may not be illegal — it’s just not right. Part of being a mindful fiduciary means getting rid of even potential conflicts of interests, not justifying actions that might be legally defensible. Maybe it’s the difference between being a fiduciary and a steward.
