More and more plan sponsors are talking about paying their DC providers like record keepers and advisors through a flat fee arrangement rather than asset based. The DOL conflict-of-interest rule will only accelerate that movement.
Revenue sharing and asset-based fees grew out of the desire of plan sponsors to shift the costs of running a plan to participants. For small and mid-market plans, and even to a certain extent larger plans, out of sight became out of mind. That is, until the SEC started investigating payments by money managers to investment consultants in the early 2000s. And until Jerry Schlichter started suing plan sponsors and providers for alleged conflicts of interests. And until the DOL finally imposed fee disclosure rules.
I’m surprised, on the one hand, at the number of plan sponsors that are moving to flat fee arrangements with their advisors, but on the other hand, remain clueless about how revenue sharing works. The reality is that the advisor and provider cost are based on the number of participants they serve as well as the services provided. Yet in many cases they are paid on the assets in the plan.
When plan sponsors, most of whom are good business people, get their minds around how DC plans are run, asset-based fees make no sense. Would they pay their CPA based on the revenue of the company when they do their taxes? As plan sponsors start treating their DC plans like other aspects of their business, and realizing that helping people to retire on time and relieving financial stress is good for their bottom line, they’ll start negotiating arrangements that make more sense.
At a recent educational program, a plan sponsor asked whether their payment to their ERISA attorney was a fiduciary act, even if the company paid the fee. The answer, of course, was no — not just because it was a flat fee, but because the payment was paid directly without using participants’ money.
Moving to flat fee arrangements for advisors and even record keepers eliminates many potential conflicts targeted by the DOL rule, and might even benefit the really good advisors. Rather than being compared to asset-based fees that other advisors charge based on benchmarking databases that are less than accurate, or even RFPs, flat fee payments based on services provided and the number of participants in the plan highlights the value of a good advisor and shifts the focus to quality, not cost — just like with the company’s attorneys and CPAs.