When the 401(k) retirement plan was born in 1981, it was originally designed as a way for employees to defer extra savings or bonus money on a pre-tax basis. Today, the 401(k) has eclipsed the traditional defined benefit (DB) plan to become the primary vehicle for financing retirement in America.
According to an AARP study, 401(k) plans are estimated to cover 69 percent of the work force that participates in an employer-sponsored plan, while the coverage of DB plans has shrunk to 31 percent. As financial advisors, it's our duty to ensure that participants are educated about the importance of utilizing their 401(k) to create Paychecks for Life®. However, it's also our duty not to charge excessively high plan fees, especially since those fees will need to be disclosed in 2012.
When you're educating plan participants and helping to create a stable financial future for them, you may find it difficult to determine the amount for reasonable plan fees. Because excessively high plan fees can eat into the accumulating balance of participants, the income that balance can sustain into retirement can be much lower than expected. How advisors can determine what is reasonable is hotly debated within the industry.
Advisors can charge more than their competition if they provide more substantial services. The problem isn't in charging higher prices, but in deciding what makes certain services more “substantial.” Providing participant education and investment advice can be value-added services; however, it's difficult to quantify the impact these activities may have.
Service level agreements offer one solution to this issue. By outlining plan sponsor meetings and educational programs that would occur throughout the year, advisors can assure their plan sponsors and participants that they have their best interests in mind, even if it means higher plan fees. By offering knowledgeable financial and investment advice, these gatherings can give ample opportunity to generate further business on an individual basis. Not only will advisors be fulfilling their obligation to help create a Paychecks for Life® for plan participants, but plan sponsors and participants will also be more likely to make use of their advisor’s other services.
In the future, legislators may determine exactly what's reasonable for a financial advisor to charge in plan fees. However, the current situation allows advisors to charge what they want, even if it is excessive. High fees can damage the growth of plan participants’ Paychecks for Life® and this can ruin opportunities for participants and advisors alike. By detailing services and holding plan sponsor meetings and participant education sessions, advisors can increase their plan fees while differentiating their services from the competition.
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