Reader Poll: Some Provider Practices Problematic, But…

In recent weeks, a couple of advisors have written to share experiences with provider charges that could create something of a fiduciary quandary. And, according to this week’s reader poll, they weren’t the only ones.

More than 4 in 10 (43%) said they had been confronted with some kind of restrictions that hindered or threatened to hinder their acts as a plan advisor and/or plan fiduciary; restrictions in either pricing or timing or something else, though only with some providers. Another 14% said they had encountered such restrictions, and 21% said they had, but not very often, and a like number said they hadn’t.

Asked if the issues involved charging to replace or remove funds from a 401(k), and here the experience was split right down the middle: 45% said they had been presented with that issue, 42% hadn’t, and the rest – weren’t sure.

As for responses to those restrictions (more than one response allowed):

56% – Won some, lost some.
35% – Worked around it/them.
28% – Changed providers as soon as practical.
17% – Fought the charges/practices – but lost.

As for some of the other restrictions cited, here’s a sampling:

Provider did not understand 404a5 requirement and wanted to initiate the fund change in less than 30 days. They did not have a fund change notice detailing their procedure so I had to mock up one from another provider. Their 404a5 would not remove the funds being removed until after the effective date so I had to mock up the notice. I’ve also had them want to charge $100 per fund and it was a small 10 person plan.

Only wanting to do extra things if the client/prospect agrees to recordkeeper change. Additional sales support if we sold so much, etc.

The pricing challenges presented if the plan sponsor wants to remove proprietary TDF series.

Plan sponsor wanted to add a 2nd set of TDF to their lineup (a passive TDF option). However, the plan pricing is so low that “only adding,” or removal/exchange of certain funds, results in a “pricing considerations/review” for the plan sponsor (a price increase). The plan sponsor elected to make no additions to their lineup in the TDF area.

Required proprietary investments in the plan. A required % of the funds in the plan must be proprietary.

Delays in the receipt or accounting for revenue sharing that is supposed to be returned to participants. When an EE terms and takes a distribution, sometimes revenue share dollars show up later for them. If provider bills quarterly based on accounts with a balance, potential exists that a term part gets a fee because revenue sharing showed up.

Limitations on platforms for certain reasons due to provider bias (money management conflicts of interest).

One reader pushed back a bit on the notion: “I would say you are a terrible advisor and/or “consultant” if you don’t understand the very basic concepts of running a business. Changing investments in a plan isn’t some magical exercise where you approve a fund change and “poof,” overnight the project is done. The fact that certain people complain about the fact recordkeepers charge to do this does not understand the business and shame on you. You’re part of the problem of this never-ending cycle of fee pressure because you expect everything for “free.” This is part of the problem for your own commoditization. Making fund changes involves preparing and mailing required notices to what may be thousands of participants in any given plan (not to mention a real cost in project management to make such changes). There is no hindrance to doing this except your own expectations that everything must be free. While some providers may include this in their contract, not all providers do and this should be reflected in their contracts (and you must take these differences into account when evaluating fee structures since there are many that will provide more transparent pricing structures).”

Readers had some other interesting observations as well:

I think the additional fees are going to proliferate just as in the airline industry – fund changes are necessary so minimal additional fees while annoying are not going away. We have already seen it with loan fees charged both by TPAs and recordkeepers. I am certain there will be other fees.

We have had to weigh the cost benefit for the participants between removing mediocre funds vs. changing vendors to better accommodate the investment lineup. It’s much worse in the small plan market.

Pricing that changes with number of proprietary investments gives the advisor another challenge to determine exactly what everyone is being paid. We don’t eliminate a vendor if their pricing works this way but we do ask them additional disclosure.

Thanks to everyone who participated in our weekly NAPA Net reader poll!

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