When I started in the retirement plan business, the third-party administrator (TPA) related law firm I was working at was charging $2,000 a plan document. 24 years later in 2022, that’s still my going rate. While my real estate taxes and health insurance premiums aren’t as static, the reason I’m ok to charge the same amount I did 18 years ago is that technology has made it easier to draft plan documents and I can simply email them to clients in a PDF with electronic signature capability. What time it took me to draft one plan document, I can draft four.
Technology has allowed us to be more efficient and for us to still make money and charge less of a fee. Fee disclosure regulations have also sped up the competition where fees are going lower and lower. That’s the price to pay for transparency and competition. I envision that the new Fiduciary Rule will have the same effect as fees as advisory fees will go down because of competition and the elimination of some inherent conflict of interests in the broker business.
There is a genuine fear that we are in a race to zero fees and all I can say is that there will be less of a race if we don’t join it. There are times I’ve turned down business because I didn’t want to do a plan document for $250 or do something labor-intensive that didn’t justify my fee. Like I say with some of the plan documents that I have to compete with provided by bundled providers, I always say I can’t compete with free. There are many low-cost providers out there and some do a very good job and some don’t. There is always going to be someone who is going to charge a small flat fee to advise such a larger plan that the work is far extensive from the fee. What I’m saying is that you don’t have to get in a competitive race where your fee is outweighed substantially by your work, but the days when you were getting 100 bps to advise a participant-directed plan are over too.
Sure there are going to be plan providers who are going to race to zero, but they are going to learn a hard fact that so many other such providers have learned in the past: there is no money and no profit in that kind of pursuit, it reminds me of this broker business called Foxton’s that was going to revolutionize the home brokerage business by only accepting a 2-3% commission when everyone else was charging 4-6%. It failed because people didn’t see the value of saving the extra point or two when Foxton’s didn’t go the Multiple Listing Service route and couldn’t get enough inventory of houses to justify the fee. I have learned over time that cutting fees to the bone only works when you have a surplus of clients. Racing down to zero in your fees is a recipe for disaster if it doesn’t drum up that business.
So my point here is that you should always be cognizant of your fee as it stands in a marketplace, but you are going to cut your news to spite your face by joining this fruitless race to zero in plan fees.