Given the regulatory emphasis toward fee transparency of the last few years — a tenet I wholeheartedly agree with — it is quite understandable that many of the conversations I have with plan sponsors revolve around the various fees associated with their plans.

Often, the desired goal is to reduce fees as much as possible. This is understandable, especially considering that if plan fees are a potential liability, the logic is sound that the least amount of fees paid reduces that liability. But does it really?

I often try to play devil’s advocate in moments such as these, because it is in fully understanding all the implications of a decision that a plan sponsor can be most effective.

Also see: "6 best practices to implement auto-escalation in retirement plans."

As fiduciaries, we have the duty to abide by the prudence rule, which some have taken to mean that they should reduce fees as much as possible. But let me ask you: If, as a consumer, I purchased something exclusively on the basis of cost, without considering quality, features, or relative competitors, have I made a prudent decision?

The answer to the question is an emphatic, “No.” You wouldn’t go to a car lot and purchase a vehicle based solely on price. Why would a record keeper, third party administrator, adviser, or investment manager be any different?

The big picture

Naturally, it would be more prudent to understand exactly what the marketplace looked like and use that information to find a vehicle that met your needs and your price range. Then you’d understand the value of, let’s say, reliability and age in the marketplace.

Choosing the cheapest option isn’t necessarily the most prudent one. A plan sponsor must understand how the fees they pay and the services they receive fit into the marketplace. And above all, they have to align those fees and services with the goals of the plan and the participants.

As an example, indexed investment solutions are often much cheaper than their actively managed counterparts. (And often, indexed investment solutions are a perfectly acceptable vehicle to include in a retirement plan.)

Also see: "Plan sponsors: Investment menus are not designed in a vacuum."

However, a plan sponsor has to understand an investment in the context of fees, various statistical measures, and how it fits in with the demographics of the plan. It is that last measure that often gets lost in this regulatory environment that is focused on the fee factor. And, as always, document every decision and the rationale behind it.

This will help in the understanding of the value you’re getting. Thereafter, regular evaluations and understanding of the marketplace will keep you a prudent consumer.

Just as you would consider your needs when evaluating whether to buy a sports car or an SUV, you have to consider the needs of your participants when choosing investment options, record keepers, or other consultants. Always ask yourself: Are you getting what you’re paying for?

Ludwig, ChFC, AIF, CRPS, is an LPL Financial adviser with LHD Retirement. Reach him at

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

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