We recently came across a case involving a broker who collected a large asset- based deposit fee on the rollover deposits of a 401k plan with eight figures in assets.The plan was already under the broker’s control - it was not a takeover. The rational for the client to change plans was to improve the plan by lowering the investment costs. While the “fee” was disclosed (in small type) to the client in the agreement, we were doubtful the plan sponsor understood the significance of it.
This “fee” was really finder’s fee, also known as a commission.
Red Flags
The vendor of the 401k plan labeled the revenue paid to the broker as a “fee” when it was a commission - an amount paid to the representative’s broker/dealer and then on to the broker.
The broker who sold the plan was already being compensated – if not over-compensated for the plan under his control. In fact, the broker was being paid based on deposits made to the plan and also total balances - essentially being paid once up front as a finder’s fee, and then twice more along the way.
Under what circumstances does the broker earn a commission for moving plans, when the original plan that was moved was also set up with his recommendation? Broker: “I got paid to put you in a bad plan, now let me get paid again to put you in a better plan.”
The near six figure commission paid to the broker will undoubtedly be borne by the participants as it becomes another cost that has to be recouped by the vendor. The plan sponsor, as a fiduciary, has a legal duty to make sure fees and costs are reasonable. It is hard to fathom how such costs could be considered reasonable.
The concept of churning – moving funds or accounts to generate commissions - has always been a violation of securities rules. Doing so in an ERISA based account, is even more egregious. 401k plans are run for the benefit of the participant. When another person or persons are responsible for the decisions and costs that affect participants, up- front commissions or finder’s fees must be eliminated, by default.
Steps for Plan Sponsors
Request that all compensation paid to a broker is either flat fee or based on only assets. No upfront deposit based fees should be paid.
Carefully review the word “fee” in any agreement being offered by a broker. Fees should only be earned by a registered investment advisor. If a broker is involved, the compensation is a commission.
Understand the difference between a broker, and a registered investment advisor. Registered investment advisors can accept fiduciary responsibility when working with the plan. Under this format, the advisor has an exclusive duty to the plan and the participant and will not accept deposits based fees.
Know your fiduciary responsibilities. ERISA makes entering a relationship for service a prohibited transaction automatically – unless it meets certain exemptions. One such exemption is provided if the fees are reasonable for the service.
Making it Reasonable
Advisors servicing 401k plans serve a valuable function and deserve to be compensated for their expertise and work. However, compensation must be reasonable. Without reasonable compensation, the plan sponsor is at serious risk of a prohibited transaction and the participants being represented unfairly.
William Kring, CFP, AIF, is chief investment officer and accredited investment fiduciary for Wealth and Pension Services Group, Inc. an SEC registered investment advisor. Kring is also the founder of 401k ProAdvisor, a full service retirement plan manager, where he assists ERISA retirement plans in meeting their fiduciary responsibilities through fiduciary consulting services, monitoring, reporting services, and investment management. For comments or questions, email to This e-mail address is being protected from spambots. You need JavaScript enabled to view it