The Eternal Question

The trend for full disclosure of fees began with the mutual fund trading scandal. I felt I needed to be in front of this issue so I began disclosing all my fees at every investment review. Today, my company offers full disclosure of all our fees. They are not only disclosed from a revenue-sharing perspective, but also benchmarked with respect to what is fair and reasonable from a vendor perspective. However, that is only part of the story.

I have had exposure to many seasoned advisers in the industry and we all have the same question: “What is reasonable with respect to our fees?” It is my opinion that this business is just now formulating what is reasonable. Despite searching, I have found limited data available from only a select group of advisers. With the new 408(b)2 regulations, it is critical that we are in the forefront of this effort and that we begin to formulate a sound process for benchmarking our fees.

Starting Out

I think we need to take a step back and educate all the plan committee members we deal with to remind them that a fiduciary’s duties in respect to fees, are to:

• Know and understand the fees associated with each investment option
• Ensure that plan expenses are reasonable in light of the level and quality of services provided
• Monitor fees charged by investment alternatives to determine if the plan fees remain appropriate for the level and quality of services that are provided.

Contrary to many media reports, I believe the adviser community has done a very good job helping clients understand whether their plan fees are reasonable for the services they receive from providers. Where I believe there is room for improvement is in determining what is fair and reasonable with respect to our advisory fees.

When I poll my colleagues as to what fee schedules they think are fair, the answer always comes back: “Well, it depends. What services are you providing and who on your staff are providing them?” Below are some factors that I believe are needed to formulate a pricing model to determine what is reasonable. Besides the obvious, (the size of the plan), I believe the following services need to be considered when determining a pricing model:

• development of plan philosophy
• committee education
• development of an investment policy statement and annual review of it
• plan design and analysis
• plan document review
• investment due diligence
• RFP or benchmarking process
• enrollment meetings.

Of course, not every client wants all the services. The most prudent process to follow is to assign a value for each service offered. For example, a plan that demands four quarterly reviews with a formal meeting will price higher than a plan that wants one review per year. With the implementation of automatic enrollment and expanded use of target-date funds, clients may start demanding different types of meetings and this, too, must be considered. For example, some of my clients recently have committed to targeted meetings based on specific retirement dates. In this scenario, a group of employees age 60 or older would have a meeting based on their needs and would discuss things such as retiree health care, while a meeting with participants ages 20 to 30, who seem quite happy doing things online, would consider things such as increasing deferrals. This alone will create the need for our staffs to be well-rounded with respect to total retirement planning.

More challenging is how to factor in events such as mergers and acquisitions, operational defects, execution of plan design changes, and various other issues. For these reasons, a flat fee does not always work.

With the 408(b)(2) regulations forthcoming, now is the time for advisers, as fiduciaries, to assure clients we will comply with the disclosure requirements and agreements that will need to be in place by 2009. This new reporting requirement will push our industry to some benchmarking standards, which may push some advisers who are not providing the services out of the business.

Barbara J. Delaney is Principal at Stonestreet Equity, Inc., a member firm of National Retirement Partners. Delaney has been navigating the financial world for more than 25 years. In 2001, after holding­ positions at E.F. Hutton and Tribus Companies, she launched her own retirement plan consulting firm, FFoA, which was named PLANSPONSOR’s 2008 Retirement Plan Adviser Team of the Year. In 2008, FFoA merged with Avenir Equity and Madison­ Pension Services to become Stonestreet Equity, Inc. Delaney­ recently­ was appointed­ to the Advisory Board for Prudential­ Retirement­ Services and has spoken at numerous industry conferences­. She also has authored articles for industry publications.

*Photography by James Rajotte