When I was 13 and had my Bar Mitzvah, I spent around $2,000 (in 1985 money) on a state-of-the-art Apple IIe with a monochrome monitor. One of the first pieces of software I purchased was the top desktop publishing program known as Print Shop. I ordered it through mail order (yes, there was life before Amazon.com) for about $30. I remember my wealthy uncle bought the same program for my cousin at around $60. He didn’t mind paying double the price I paid. It seems that some people are willing to overpay.
I have a mantra: I dislike paying retail. I love a good sale. However, some people look down on those who pay less or shop at discount or outlet stores, thinking it’s somehow wrong to seek bargains. Unfortunately, plan fiduciaries, such as plan sponsors and trustees, don’t have that luxury. With their fiduciary duty at stake, plan sponsors must pay reasonable expenses for the services they utilize. They can only determine whether the fees they incur are reasonable by comparing their plan with those offered by other service providers. If they fail to shop around and end up overpaying, they could face liability from plan participants. It’s important to note that plan sponsors are not obligated to choose the cheapest providers, as lower prices can sometimes indicate a lack of quality. So, how can one determine if a plan sponsor is paying excessively? As Justice Potter Stewart famously stated, “I know it when I see it.” I have encountered information disclosed on Form 5500 that illustrates this issue. For example, I’ve seen a plan sponsor pay $54,000 to a Big 4 accounting firm for a limited scope audit or another sponsor pay a broker 60 basis points (0.60%) on a $14 million 401(k) plan. These examples show that some plan sponsors are significantly overpaying for services. Fee disclosure has made it easier to identify these cases, but again, plan sponsors can only determine this by surveying the 401(k) marketplace to see what their peers are paying.
