10 years before I went on my own and started my own practice, I started The Rosenbaum Law Firm P.C. It was a side venture, kind of an attempt to see if I can start my own practice without actually having to leave my day job. If this side venture would be an indicator whether I could go on my own, then I shouldn’t go on my own because it was a flop. I started a law practice that was going to be the Wal-Mart of legal services, charging low flat fees for wills, incorporations, and contracts. It flopped because people didn’t think that legal services are something they should buy on a deep discount.
Since fee disclosure has been on everybody’s minds for years, I think there are plan providers that focus too much on fees. While excessive plan fees are evidence that there is a breach of fiduciary duty and part of the problem affecting 401(k) plans, to me, it’s not the most important issue that negatively effects retirement plans today.
To me, the greatest issue is the fiduciary process or lack thereof. The issue is about placing the control of investments in the group with the least education to make informed decisions, the participants. This isn’t a criticism of the participant directed model under ERISA 404(c) that is supposed to limit a plan sponsor’s liability for losses sustained by participants in their investment direction. The problem is that most plan sponsors aren’t aware that they are losing the protection of ERISA 404(c) by neglecting their fiduciary duty. Picking a financial advisor who doesn’t help the plan sponsor in the fiduciary process, namely developing an investment policy statement and educating plan participants does a lot more harm than good.
An advisor friend of mine once was prospecting a case recently where the plan had an ERISA 3(21) fiduciary as the advisor, who didn’t change the fund lineup in 5 years, had investment options that were duplicitous, and is missing certain areas of the market for investment. Yet the current advisor was an ERISA 3(21) fiduciary. Let’s face it, the number sound nice, but an ERISA 3(21) fiduciary not doing their job is as Dean Wormer would say: an ERISA “0.0” fiduciary.
Plan sponsors as a whole don’t do a very good job with providing participants with enough education, so that the participants can make informed decisions. While the Department of Labor allowed advisors to provide investment advice, very few have offered it because of the expense and very few know of other provider like RJ20.com that can offer the investment advice for a very reasonable per head charge.
So while so many advisors see fee disclosure as a win-win opportunity to gain clients, one should also look at potential clients with ineffective or missing in action advisors. However, plan paying excessive fees are probably more likely to have other fiduciary issues than companies that are paying reasonable fees. At least, that’s what I think.
So excessive fees are part of the problem, but I think the lack of participant education and lack of fiduciary oversight are bigger problems that won’t go away anytime soon.