When are fees reasonable and when are they excessive? Does disclosure make a fee OK? Is disclosure really the same as being transparent with regard to fees?
Over the past few years we have seen several reports about things like a mutual
fund company that required kickbacks from a big administration firm in exchange for the fund company's recommending their administrative services. One major mutual fund company was charged with buying “shelf space” to be included in a major payroll provider’s product fund line up. Fees of up to 3% that should have been absorbed by the mutual fund company and/or administrator were instead passed through to the clients of these entities, all without their knowledge.
At the same time it would be irresponsible to suggest that all fees are inherently bad and all fee sharing agreements detrimental. There is a cost to providing plan related services and some
of these fees often go to offset those costs. The plan sponsor is required to understand what these fees are and to make informed decisions
as to whether they are reasonable. This is where fee disclosure and transparency are essential. Unfortunately, the disclosure practices of some service providers makes that understanding more difficult rather than less difficult.
Some warning signs are things like plan products with multiple pages of fee disclosures. Statements like “we may/do engage in revenue sharing” without specific amounts can serve to obfuscate fees that might be excessive.
Some providers charge different plans different amounts. They report performance
numbers before fees and then provide a disclaimer saying there might be additional
fees that affect performance but do not state what those fees are nor provide information
on where to obtain this information. The plan participant most often believes
they are acheiving the reported results when in reality they are not.
If a vendor is not completely open and proactive about disclosing fees perhaps there
is a reason.