As an actuary, Ive always been aware of the motto for the Society of Actuaries, which is a John Ruskin quote: The work of science is to substitute facts for appearances and demonstrations for impressions. I quote this regularly when I speak to lawmakers pushing ideas based on assertions, hearsay and plausibility rather than on facts and science. Ive come to truly appreciate the wisdom that was John Ruskin.
There has been so much focus lately on the cost of retirement plans. The discussion often weighs too heavily on fees to the detriment of an analysis of the value received for what is paid. It reminds me of another quote from Ruskin: There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this mans lawful prey.
With regard to retirement plan services, it brings to mind the complexity of administration in a 403(b) plan (or any other defined contribution plan for that matter) when administration requires taking into account contracts from multiple providers. This could be in a multiple provider environment or a single provider environment with plan assets in legacy contracts with prior providers.
I frequently hear about service providers in the marketplace that represent these complicated administrative requirements with statements like, dont worry about it, weve got it covered. Fees charged are typically low.
The devil is in the details
Responsible plan fiduciaries and their advisers need to ask the tough questions to see what theyre actually getting for the price, and whether or not its really a good value.
Some of the questions I suggest:
- How are small amount force outs handled across contracts with multiple providers to ensure dollar limitations are not exceeded?
- How are qualified domestic relations orders (QDROs) handled to ensure all plan assets are appropriately taken into account? Remember that QDROs are a plan concept and therefore a domestic relations order issued to a provider for their contract cannot be a QDRO. It must be issued to the plan and the plan administrator can only approve it as qualified if it meets all of the plans requirements, including clearly delineating how the entire account balance (taking into account all providers) is to be treated.
- How are beneficiary designations tracked and handled for death claims? Most plans Ive read talk about beneficiary designation for the plan, yet in practice, providers seem to want their own beneficiary designation on file. If there are conflicting beneficiary designations, its a lawsuit waiting to happen.
Generally speaking, the low-cost providers who say weve got you covered havent even thought about these issues. If the plan winds up with tax code or regulatory violations, or lawsuits by beneficiaries, is that lower cost really worth it?
Ruskin also said, Its unwise to pay too much, but its worse to pay too little. When you pay too much, you lose a little money thats all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot it cant be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you have enough to pay for something better.
In a more commonly heard expression, You get what you pay for.
Has this been your experience as well? Lets chat in the comments.
Friedman is the tax-exempt national practice leader with the Principal Financial Group. A noted expert on 403(b) plan design, he has been consulting with tax-exempt organizations for over 20 years and has been in the retirement plan business since 1986. A version of this blog originally ran on The Principal blog. Follow Aaron on Twitter @1AaronFriedman1.
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