Is Fee Compression Always Good?

shutterstock_649759897_socialIn the defined contribution retirement plan space, plan sponsors continue to be laser-focused on fees.  According to Callan’s 2018 Defined Contribution Trends Survey, “the most important step plan sponsors took within the past 12 months to improve the fiduciary position of their DC plan was to review plan fees [emphasis added].”[1]  Fee compression exists for recordkeeping and administration fees, as previously discussed in several posts by Erik Daley (proprietary investment management, managed accounts, IRA rollovers, cross-selling retail financial products, and annuitization), and it also has started in the retirement plan advisor/consultant space.

In many cases, fee compression is warranted.  You have all heard the examples of the retirement plan advisor – an old golf buddy – who never showed up to provide services to the plan(s) but captured thousands of dollars from the participants’ pockets.  In this circumstance, participants are unknowingly wasting their retirement assets to fund a financial professional’s lifestyle in which case fee evaluation and fee compression are warranted (and required by the regulations).

But, not all cases are like that illustration.  It is critical to continually evaluate fees and document that evaluation to ensure the plan pays no more than reasonable fees as required by ERISA Section 408(b)(2).  However, there can be risks associated with continued fee compression (i.e., continually pushing fees lower and lower and lower).

Service Levels: Are service levels at risk by continuing to emphasize fee reduction?  I would argue yes.  Retirement plan service providers are running a business – just like plan sponsors.  There is a sweet spot in which fees are no longer excessive, yet fees allow the service provider to retain good talent to provide good services for the retirement plan.  If fees are pushed too low, will service providers cut good talent, which may result in poor services?  Keep in mind that ERISA requires that fees are equal to the services and that if there is a high level of services, it’s okay to pay more for that high service level. 

Cross-selling in the Advisor Space: Recent posts on the Multnomah Group blog have discussed cross-selling in the recordkeeping space, but it exists in the advisor/consultant space too and now in new ways.  This is the idea that it may be okay for the core service – such as recordkeeping or investment advisory services – to be essentially free because the service provider can sell another product to the plan or participants to make up the difference. However, this may be fraught with conflicts that the plan sponsor should be able to identify and assess. 

In the advisor space, for example, there is a new product where participants receive “cash back” to their 401(k) or 403(b) tied to their credit-card purchases at certain merchants.[2]  Good concept, but the owners of a company offering this product are retirement plan advisors, which ultimately means they will have an interest in selling this to their clients (to whom they may already be a fiduciary).  While there is nothing per se wrong with this arrangement or new product, plan sponsors should be able to identify the potential conflict, assess it, and document such evaluation.   

Action Steps for Plan Sponsors
So where does this leave plan sponsors?  This post is not suggesting that you should stop monitoring fees because fee reductions are bad.  Under ERISA, fee monitoring is required, and fee negotiations are critical.  However, I would suggest that there is a floor – or a sweet spot – in which fees cannot go any lower before there are negative consequences and as a plan sponsor, it is critical to be aware of this balance.  Consider the following action items in the coming months and years:

  • Identify covered service providers under ERISA Section 408(b)(2)
  • Review Section 408(b)(2) disclosure annually and document such review
  • On an as-needed basis, benchmark and re-negotiate fees
  • Identify areas of cross-selling from service providers
  • Where cross-selling exists, assess and document any conflicts of interest from service providers

If you have any questions about where conflicts of interest or cross-selling may exist, be sure to contact a Multnomah Group consultant


[1] Callan, 2018 Defined Contribution Trends, available here:

[2] InvestmentNews, Employees can now save in a 401(k) by using a credit card, available here:

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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