Worry Over 401(k) Fees Rises as Lawsuits Increase

"It used to be that advisors were paid a lot under the commission-based system for relatively little work," Weir said. "We're much happier with the current system where you get paid a reasonable fee for adding a lot of value."

Service, Education Key to Protecting Advisors

To protect themselves from lawsuits, advisors should focus on providing the level of service that participants are paying for, and consistently communicate with sponsors and participants to make sure they understand what they're paying and why, Weir said.  

Communicating with sponsors is easier, Weir said, because it's obviously a smaller group. Quarterly plan reviews should address fees as well as investment performance and other issues.

Retirement Benefits Group hired a third-party to benchmark their fees against the rest of the industry, something Weir recommends other advisors do as well.

"We think that's particularly critical because it's the sponsor's fiduciary responsibility to make sure the fees they're paying are reasonable, and what context do they have for that without having a third party?" he said. "Otherwise they're depending on us to review our fees, which is a conflict of interest."

Analyzing fees is difficult because fees may be higher than similarly sized plans if they're serviced differently.

"What is the average advisor fee on a $20 million plan? Without the context of the service provided, that's not going to be very accurate because there's huge variation in the services that advisors provide," Weir said.

Communicating fees to participants is considerably more difficult, Weir said. "You have a diffuse group of individuals that you're trying to educate. You have no idea of their level of understanding, and you don't have a lot of opportunity to speak to them directly."

Another headwind advisors are up against is participants' mistaken belief that their 401(k) plan is free. Some advisors may be concerned that in addition to making their plan look bad, participants might be dissuaded from contributing as much or signing up at all, Weir said. "It's not necessarily an underhanded thing," he said. "If worrying about 80 basis points in fees is going to get in the way" of participants saving for retirement, "that's an issue."

RBG works to overcome that through education, Weir said. Written fee disclosures, which are required by law, don't always have the effect they're meant to because "participants don't always read it."

Educational sessions, either in a group setting or a webinar, can help get past that, he suggested. "We focus heavily on participant education. We see that as a huge value add."

One-on-one education takes more work, but is also effective, especially for plans with fewer than 500 participants, Weir said. "That really gives you the opportunity to explain those fees."

The fiduciary rule requires that advisors act as would a reasonable person with knowledge of the subject matter, Weir said. "Obviously the plan sponsor's business is to run their core business. They hire somebody to be their advocate and sit on their side of the table who is knowledgeable about this business. Therefore they need to act as that advocate, look out for the best interest of the plan sponsor and the participants."

— Read Does DOL Fiduciary Rule Create a New Right to Sue? on ThinkAdvisor.