401 (k) Plans: Is Cheapest Always Best?

This was the subject of quite a lengthy debate in the 401(k) group
on LinkedIn last week.  By the end of the day on Friday, there
were more than 40 comments.  While
the discussion took a few twists and turns, the primary debate was whether it
is ever appropriate for a plan to pay a higher fee for a service if there is a
lower-cost option available.

This post is not about answering that question but rather what
I perceived to be an apparent lack of appreciation for the complexity of all
aspects of the qualified plan world and a sense that certain disciplines within
the business have the market cornered on expertise worthy of a higher fee
while others are simply commodities.

Thanks to the government, all who work with qualified plans
are subject to laws and regulations that fill countless reams of paper.  PPA alone is more than 1,000 pages long
and includes something for everyone – actuaries and investment advisors, record-keepers
and consultants, attorneys and accountants (apologies if I missed anyone).

There are players within each of these subsets who dabble
and those who are experts.  Some
are reactive and some proactive. 
There are those who shuffle data and those who ask questions.  In short, there are vendors and there
are trusted advisors.

Even among
the trusted advisors, not all are created equal.  One wouldn’t expect all doctors to have the specialized
knowledge to perform brain surgery, so why expect all attorneys to understand
Title I of ERISA?  The same can be
said of the other disciplines – not all investment advisors understand
fiduciary responsibility or prohibited transactions; not all CPAs know how to
audit 401(k) plans; and not all TPAs know the rules thoroughly enough to do
anything more than hope the software gets it right.

Those of us who have chosen to make a career of working with
retirement plans owe it to ourselves and our clients to recognize the importance
of working with other professionals who not only know what they are doing but
also have the “client service gene” that allows them to apply the knowledge in
a way that is meaningful and practical.  That
expertise might not come cheap, but it’s much less costly than paying $1,100
per day when a Form 5500 is rejected due to a deficient audit or tens of
thousands of dollars in professional fees, make-up contributions and penalties when
a low-cost record-keeper uses the wrong definition of compensation to calculate
a match because they don’t know how to read a plan document.

Not to mention, if we seek to work with only trusted
advisors, we are much less likely to have a vendor suggest to one of our clients that a cheaper alternative is better.

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