This is a hidden column


Retirement Plan Design: Tips to Help Get What You Pay For

David Blanchett, Morningstar Investment Management LLC


Running a retirement benefits plan costs money. There are the administration fees, fund expenses, consultant fees, managed account fees—and the list goes on. For each item on that list, a plan sponsor could be sued for not properly monitoring the costs to make sure that they are reasonable. Plus, plan sponsors want to know that they are actually getting the value and service for the costs they incurred.

Tips on how to help get the most out of your retirement plan design

Compare investment expenses. A peer group comparison of the investment-only expenses is just one part of the total costs of a defined-contribution plan. It’s also important to be mindful of the peer group. The peer group for a $5 billion defined-contribution plan is vastly different than that of a $50 million defined-contribution plan. This is typically easy information for a consultant or provider to gather, and it should be delivered on a quarterly basis.

Assess administration expenses. Request for proposals, or RFPs, are time-consuming, but they often result in a better price, more service, and often both. Don’t let your provider run your retirement plan design; they are not the fiduciary. It’s important to ask your provider for a detailed fee analysis of all plan fees on an annual basis.

Examine how fees are paid. Uneven expense arrangements, with fees through revenue sharing or brokerage fees rather than a purer administrative fee, are under more and more scrutiny. These arrangements can lead to a big question: Should a participant who uses a service that carries revenue sharing or generates some fee pay more for the administration of the plan? We believe the answer is no. We believe a level, balanced administrative fee approach is more prudent. Within this context, it’s important to help ensure that some participants aren’t subsidizing the plan cost for others by investing in funds with higher revenue sharing.

Evaluate whether you’re getting prudent investment advice. Consultants give investment recommendations, conduct quarterly reviews, and monitor their recommendations. Once upon a time, independent information and data about investments was hard to come by. However, with vast amounts of data and analytics tools now available on the web, those days are gone.

So how do you know if your consultant is giving you high-quality advice that is worth the fee? It’s a tough question with no easy answer, but here are a few ideas that could be useful:

  • Keep a log. If a fund is being replaced for performance reasons, continue to keep track of that fund and compare the future performance of the two funds. You can even request that an appendix be added to the quarterly performance book with all the replaced funds and their relevant statistics.
  • Check the process. When you receive a recommendation, focus on how the recommendation was derived or the process that led to a particular fund recommendation. Many consultants will provide a map of each round of analysis, showing the total number of funds that were eliminated based upon each of their criteria. Ask yourself if there is anything innovative, proprietary, or unique that makes this process valuable.
  • Take a step back. It’s easy for investment consultants to dazzle plan sponsors with fancy statistics about investment performance, but how does it all fit into the big picture? Sure, creating alpha of 100 basis points in a fund may be great, but how much of the assets are actually in the fund? Is the fund suitable for the plan participants? Is it being used appropriately? These are all questions that should be addressed when thinking about plan investments.

Please see below for an important disclosure.

Find out how plan sponsors can help maximize retirement success for their participants.

Download Our White Paper

Important Disclosure

Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Opinions expressed are as of the date indicated; such opinions are subject to change without notice. Morningstar Investment Management and its affiliates shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Before making any investment decision, please consider consulting a financial or tax professional regarding your unique situation.

The Morningstar Retirement Quiz for Advisors

Test your knowledge and get ideas for helping your clients.

Trending Research

Get our latest in-depth analysis and differentiated industry coverage.

Join us at the Morningstar Investment Conference

Register for MIC June 3-5