In my last column, I noted how 401(k) plans may now actually be free for smaller entities leveraging SECURE 2.0 tax credits, Starter K or state auto-IRA plans, all of which are positives as compared with the nefarious and duplicitous claims made decades ago by record-keepers.
Now it seems that advisor commissions have returned but without any inherent benefits to clients.
The evolution of retirement plan advisor fees tells a lot about the evolution of the RPA industry.
It all started in the 1990s with 12b-1 fees from various share classes eventually settling on A shares as the industry realized that B and C shares did not make sense for defined contribution plans. Though A shares were more equitable, some advisors took advantage of the upfront 100 basis point payments moving clients from one fund to another with no benefit to them.
Insurance providers quickly woke up to the opportunity to sell smaller plans, paying advisors through a wrap fee, which was not always disclosed. Little oversight led to many exorbitant commission schemes.
Savvy advisors started acting as fiduciaries in the 2000s, charging an asset-based fee like an RIA focused on helping plans save money exposing “hidden” revenue share arrangements while acting in their clients’ best interest.
R Shares developed for retirement plans eventually replaced A shares.
In the past few years, many RPAs have been charging a fixed fee for base Triple F plan services and then additional charges for other services like education and one-on-one meetings. Why should an advisor’s fee grow because of market gains and contributions without increased work? Some argue that liability increases with assets, but that rings hollow.
As RPA fees continue to decline with one national firm allegedly charging $35,000 for base plan services on a $1.3 billion plan, many advisors search for additional revenue through participant services and investments.
There is no issue for an ERISA plan advisor to offer wealth services to participants if fully disclosed with permission from the plan sponsor. There is an issue if the underlying assets being recommended are proprietary or result in increased revenue. That is why fiduciary advisor fees must be level and reasonable.
So can a fiduciary advisor receive additional fees from a managed account provider whether private label or not? Can an advisor or the firm they work for get additional revenue from private labeled investments, a concept currently being litigated? What is the difference between these payments and a commission?
A prominent lawyer explained to me that these arrangements are legal as tested in the Loews’ case involving AON if there is proper disclosure, which goes something like this: “I act as a fiduciary for most of my services but for this managed account or proprietary product or service, I am not a fiduciary. I am a salesperson representing a product or service, not your best interests.”
It’s like your doctor who you expect to provide the best care for you regardless of the fees they receive recommending a drug they developed or for which they get additional revenue. It rings hollow and completely changes the dynamics of the relationship, in my opinion.
Some will argue that this bifurcated fiduciary arrangement is acceptable if the performance of the proprietary product or service is good, but we all know that good results do not overcome bad process.
Advisors need not stop looking for additional revenue, but rather than being paid by the product or service manufacturer, why not be paid to vet or conduct ongoing due diligence as a fiduciary?
Though commissions make sense in some circumstances, fiduciary RPAs paid additional fees from manufacturers or through proprietary products have no place in today’s transparent fiduciary world, which someday will hopefully evolve to a stewardship.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.