Some consider 401(k) fees too low

CHICAGO — With a House panel scheduled to hold a hearing Tuesday to discuss whether the hidden fees in 401(k) plans are fair, at least one industry watcher is calling such fees too low and another says making general judgments about them is difficult.
The Committee on Education and Labor’s hearing is intended to scrutinize hidden fees and determine the effect on participants.
Although many have said that these fees are too high, the real issue about fees should be disclosing them properly, said Phil Chiricotti, president of The Center for Due Diligence in Western Springs, Ill. The center is an independent-research organization that specializes in analyzing the competitiveness of 401(k) programs for advisers.
Barbara Roper agrees. “The heart of the problem is the disclosure of these fees,” said the Pueblo, Colo.-based director of investor protection for the Consumer Federation of America in Washington.
Ms. Roper pointed out, however, that research shows “there’s not a lot of evidence that investors pay close attention to disclosure.”
Despite that, she fully supports strong disclosure. But Ms. Roper noted that disclosure “isn’t a substitute for restrictions on abusive practices, including perhaps excessive fees.”
Not black and white
The topic is difficult, because fees can be charged for various services, said Rick Meigs, president and founder of 401khelpcenter.com LLC, a Portland, Ore.-based independent source for 401(k) plan information. “These are complex plans, and the fees are really dictated by the services that you’re getting and the vendors you’re going with,” he said.
To make his point, Mr. Meigs noted that an adviser could charge 1.1% of assets for a $10 million 401(k) plan and provide monthly statements, investment advice, educational material and other programs. At the same time, another adviser could charge 0.9% for a $10 million plan but might not offer many services.
“You’ve got to be careful,” Mr. Meigs said.
“It’s very difficult to make general judgments on these things,” he said. “You need to push for full disclosure and let the market control it.”
Mr. Chiricotti said, “Fees must be related to services.” He noted: “Fees are definitely too low.”
There is no question that fees can vary from adviser to adviser, said Ed Ferrigno, vice president in the Washington office of the Chicago-based Profit Sharing/ 401(k) Council of America, which represents 1,200 profit sharing and 401(k) plans.
“The evidence is, no one’s getting rich providing administrative services to the plan,” he said.
Fees on 401(k) plans aren’t cut and dry, said J. Richard Lynch, chief operating officer for Sewickley, Pa.-based Fiduciary360.
“There are so many ways people can be compensated, and the end users have a very difficult time knowing who is being paid for what,” he said. “I’m sure you have the whole spectrum — from those who are charging too much to those who aren’t charging enough.”
The fee structure is so complicated that many plan sponsors have no idea how much money they are paying to advisers or to anyone who is providing services for the plan, said Mario Giganti, an adviser and partner with Cornerstone Capital Advisors in Uniontown, Ohio. He also is managing director of Azsure Fiduciary Services, an independent investment fiduciary consulting and registered investment advisory firm in Uniontown.
Mr. Giganti feels that he is properly compensated, because he designs his fee structure. But he understands why some registered representatives might feel that they aren’t being paid enough, because many might receive only 12(b)-1 fees as compensation.
Those fees generally are about 0.25% of assets, much less than what Mr. Giganti said most advisers receive to oversee a 401(k) plan.
“If that’s your only compensation, then of course your compensation will be low for the required services,” he said.
Mr. Giganti said that many wirehouse reps struggle with these fee arrangements, because they often feel they aren’t being properly compensated.
Another battle many advisers face is being forced to follow bundled services arrangements where costs already are built into a plan. Many of those costs are associated with the plan but may not even be paid to the adviser, Mr. Giganti said.
He said that he has been able to knock out many of these costs for his participants while still receiving more compensation than the average rep.
“We get paid more than a typical registered rep would get paid, and the plan costs are less because we strip out the unnecessary costs,” Mr. Giganti said. “I think we get paid fantastically for what we do, but I set our prices.”
If advisers feel that the fees are too low, they have a simple way to solve the problem — increase their fees or leave their current firm and work somewhere else, Mr. Giganti said.
“It does bother me when I hear that [advisers in the industry] don’t get paid enough. Whose fault is that? Is it the broker-dealer’s fault? But you choose to work for that broker-dealer,” Mr. Giganti said.
What happens is that some advisers are forced to leave the industry, because their margins are too low, Mr. Chiricotti said. He said that it is difficult for advisers to justify capital expenses for new support systems if they aren’t getting an adequate return on the business.
What the industry needs is universal and consistent fee disclosure that would put all plans on the same level, Mr. Chiricotti said.
“All providers, including advisers, will have trouble getting paid what they are worth in the future,” he said. “In short, the future is about more work, less profit and increased liability — not a pretty picture.”