Reasonableness Versus Fairness

There are events and undefined occurrences when professionals in our business need to take a step back, and ask themselves, “Can it become any more absurd?” Those with tenure know—it can and frequently does!

The Test of Reasonableness 

As anyone familiar with the Employee Retirement Income Security Act (ERISA) knows, a plan fiduciary must ensure plan fees are “reasonable,” but how is one to determine that? Reasonableness is in the eye of the beholder and, of course, the regulator. (Perhaps that is the reason why we are born with two eyes!)

The reasonableness test often quoted, that of benchmarking fees against the industry, is a recipe for disaster if used as the sole metric. It organizes the numbers, but it does so in a vacuum. In most cases, such measures are compared with a universe of similar managers—plans having similar demographics, characteristics, or a commensurate asset base—finding fees to be reasonable so long as they are within some peer group of others.

The test does nothing to measure the veracity of the job being accomplished for participants. An exclusively fee-focused reasonableness test accomplishes nothing relative to gauging the quality of the deliverable. It is mere commentary on the pack, among which the measured run.

Consider, tomorrow, making an across-the-board adjustment of your current fees—doubling your fees. Would your fees be reasonable? Would your fees pass the reasonableness test?

Don’t answer, because there is an additional piece of information that you need to complete this exercise. What if, last weekend, every other adviser and service provider in the country had tripled their fees/pricing across the board? Now, would your fees tomorrow be reasonable?

Is Retirement Plan Pricing Fair?

Reasonableness is not fairness. Are retirement plan fees fair? Here the question becomes, for whom? As retirement plan advisers, we are charged with overseeing the safety, growth, and distribution of the retirement plan assets of the American worker for a period of approximately 10 to 30 years. Most plan advisers oversee investments, investment managers, plan documentation, performance, plan provisions, employee communications, and a host of additional duties as they arise. For this ongoing workload—excluding outliers of plans with assets less than $1 million and more than $1 billion—one might reasonably expect the annual fee to be in the range of 50 to 200 basis points of the plan assets.

Contrast the above fees for service with a letter I recently received concerning my credit card, where I was informed that there are changes being made to my account, specifically that, “as of September 15, 2011, the transaction fee for a cash advance will be either 5% of the amount of the transaction or $10.00—whichever is greater.”

When I view the above pricing and service—a quick cash advance transaction, for which a bank charges 5% and receives virtually no scrutiny versus an adviser overseeing the safety, growth, and distribution of the retirement plan assets of the American worker for a period of approximately 10 to 30 years constantly concerned about fees being questioned—one can’t help but wonder, “who have retirement plan advisers offended?”

Comparing Reasonableness and Fairness

In most businesses, there are inefficiencies associated with cancelling, moving, or rescheduling appointments. There is a cost associated with this type of “re-work.” 

Today, most advisers will re-schedule an appointment at a client’s request for which there is no fee, no up-charge, no surcharge, or no re-scheduling fee; but should there be? Is it fair for the client to cancel on the adviser? Would a charge to the plan sponsor for cancelling pass the reasonableness test?

Time is our sole raw material and inventory. When we lose it or waste it, then our efficiency suffers. It may be time to take a lead from the airlines. If we observe practices and pricing models of the travel industry, perhaps we should be invoicing for client-forced inefficiencies.

Today, our entire client base is forced to absorb the costs associated with a rogue client moving an appointment. Re-booking costs include the time (hourly wage) and resources (computer, human capital) associated with the initial booking, the business opportunities lost by not being able to accept new appointments in that time slot for the prior three weeks, and the adviser’s inability to re-book something of equal value during the cancelled time period.

What is fair and reasonable?

Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice ­serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement ­Plan Adviser of the Year award, and a faculty member of the PLANSPONSOR Institute, he is also the ­co-author of How to Build a Successful 401(k) and Retirement Plan Advisory Business.