What 7,000 Conversations With Plan Sponsors Taught Me About Retirement Plans
What I've learned about plan-sponsor psychology from a database of conversations I've compiled since 2009
Since 2009, I have kept records of conversations with people responsible for retirement plans. The database now contains more than 7,000 phone conversations, along with the circumstances surrounding the calls, what sponsors said and, when there was a follow-up, what happened afterward. I started keeping the records because I was investigating retirement-plan fees. I would find something in a Form 5500 filing that caused me to look more closely, contact the sponsor and try to understand what was behind the numbers. Over seventeen years, the conversations became a second source of information.
What I began to see was not simply a pattern in fees. The responses to those fees followed patterns too. When sponsors were presented with information that could cause them to question their advisor's compensation, they often responded by talking about the advisor. They would tell me that the advisor was a friend, someone they had known for years, someone they trusted, someone who did a lot for the company or someone they were happy with. In some cases they immediately said they didn't want to change advisors, even though I hadn't suggested changing advisors and was instead suggesting that they simply ask the existing advisor to explain the compensation or consider whether it should be reduced.
I don't think that necessarily tells us that the advisor wasn't valuable. The advisor may have been valuable, and the relationship may have been genuinely good. The problem is that "our advisor does a lot for us" doesn't answer the question of whether the compensation is reasonable. I rarely heard sponsors quantify what "a lot" meant in terms of hours, services or participant use, and I rarely heard them explain what another qualified provider would charge for comparable work. There was much more discussion of the advisor's relationship with the company than of how the sponsor had determined what the advisor's work was worth.
How many hours did the advisor spend on the plan last year?
What services were actually provided?
What would another qualified advisor charge for comparable work?
How much of those services are participants actually using?
If plan assets increased substantially, what changed about the work that would justify the corresponding increase in compensation?
These are ordinary questions when a company purchases other professional services. An attorney sends a bill and the client can ask what work was performed and how much time it required. An accountant can be asked to explain an increase in fees. A company can obtain another proposal and compare the price for comparable work. Even when a professional service is invoiced in dollars, however, the invoice may not tell the buyer how much time was spent, what that time was spent doing or whether another similarly qualified provider would charge a comparable amount for the same work. The purchasing process creates an opportunity to examine the relationship between the work and the price, but the buyer still has to use that opportunity.
Retirement-plan compensation often doesn't work that way. A fee can be deducted from participant accounts or embedded in an asset-based charge, so the employer may never receive an invoice showing what the service actually cost in dollars. A $3 million plan paying a 0.50 percent advisory fee is paying $15,000. If the plan grows to $5 million and the services remain substantially the same, the fee becomes $25,000. The amount paid has increased by $10,000 without necessarily requiring any additional work.
That also changes the relationship between the person making the purchasing decision and the people paying for the service. Some sponsors in my records clearly express concern about their employees or participants, and some acknowledge that they should investigate what they are paying. What I see much less often is a sponsor examining the arrangement from the participants' perspective and asking whether they are receiving sufficient value for the money being deducted from their accounts, whether they actually use the services or whether comparable services could be obtained for less.
A sponsor can genuinely care about employees and still have no idea how much time an advisor spends on the plan. They can believe their advisor is excellent without knowing what another advisor would charge. They can be happy with the relationship without knowing whether the compensation has any connection to the work being performed. Suggesting that these conversations serve as evidence that sponsors simply don’t care is imprecise. More accurately, they provide evidence that concern for employees and confidence in an advisor often exist without the kind of detailed examination that would connect the compensation to the services and the value received.
The same result occurs when sponsors tell me they are too busy to investigate. In some cases, what I was suggesting required very little effort. They could ask their existing advisor for an explanation of the compensation or ask the recordkeeper to reduce or eliminate a fee. One sponsor told me he didn't have the bandwidth to deal with a roughly $15,000 annual advisory fee even though he couldn't describe what the advisor was doing or how much participants were using the advisor's services. Another sponsor explicitly said he didn't want to know how much his advisor was receiving. Others actually did admit they didn't care.
Personal relationships appear repeatedly in the records as well. I have consistently encountered advisors who were friends, family members and business associates of the people responsible for the plan. In some of those cases, the sponsor acknowledged that the advisor's services were minimal or underutilized, yet the relationship continued to protect the compensation from serious scrutiny. The records also contain cases where a sponsor openly acknowledged the issue but avoided making a change because doing so would be uncomfortable.
That isn't limited to situations involving friends or relatives. I have seen the same reluctance when there was no personal relationship and when the sponsor acknowledged that the advisor's services were rarely used. Even asking the record keeper to reduce a fee could be treated as an intimidating "change," despite the fact that sponsors routinely negotiate other business expenses.
There are sponsors who respond differently. Some acknowledge that they don't understand the fee arrangement. Some say they need to look into it. Some recognize that the amount is substantial. Those responses are important because they show that the information can get through. What is much harder to find is the sponsor who goes beyond acknowledging uncertainty and is willing to let the investigation challenge an assumption that has been in place for years.
I think there are several levels of humility involved in that process. The first is being willing to acknowledge that you don't know something about the plan. The next is being willing to investigate rather than relying on the person who has always handled it. It becomes more difficult when the investigation raises the possibility that something you have accepted for years may not be reasonable, because now you have to consider that your own judgment may have been wrong. The final step is being willing to act on what you learn even when doing so could disrupt a relationship that you value.
My conversations provide evidence of the first two, but I see considerably less evidence of the latter two. I can't definitely conclude from that that plan sponsors lack those qualities generally. The conversations weren't designed as a psychological study, and I don't know what happens in every sponsor's life after the conversation ends. What I can say is that, when the conversation itself is the evidence, sponsors much more often explain why they trust or value an advisor than explain how they determined that the advisor's compensation is reasonable.
That observation becomes particularly important when the sponsor has fiduciary responsibility for the plan. A sponsor doesn't have to believe an advisor is overpaid before asking what the advisor is being paid. They don't have to distrust the advisor before asking how many hours were spent on the plan. They don't have to believe another provider would be better before finding out what another provider would charge.
The sponsor I would most like to work with might actually tell me that they love their advisor and have no desire to replace them. I have no problem with that. What I would want to hear next is that they don't actually know whether they're getting a good deal and are willing to find out. That person is not starting with the assumption that the advisor is doing something wrong, but they are also not using their affection for the advisor as evidence that the compensation is appropriate.
The conversations have also made me think differently about what intellectual curiosity and humility actually look like in someone responsible for a retirement plan. It starts with taking responsibility seriously enough to remain curious about how the plan works and being willing to acknowledge what you don't know. It includes genuinely caring about whether employees and participants are receiving good value and being willing to question long-standing relationships and conventional industry practices when the evidence warrants it. None of that requires being suspicious of an advisor or assuming that someone is doing something wrong. It requires being willing to consider that an arrangement you have trusted for years may deserve another look and, if the evidence warrants it, to put your responsibility to the plan and its participants ahead of loyalty to a particular service provider.
The structure of the retirement plan industry also makes this kind of purchasing behavior harder to develop. Retirement plans evolved through tax policy and the growth of defined contribution arrangements rather than through the creation of a conventional market for professional services. Asset-based compensation became common, fees could be deducted directly from participant accounts, and benchmarking, fiduciary status and plan audits could give sponsors confidence that the arrangement was being properly evaluated. But none of those practices requires a sponsor to determine what a service actually costs, what work was performed, how much time it required or whether another qualified provider would charge a comparable amount. The pressure to ask those questions is much stronger when a company receives a bill for a clearly defined service.
A benchmark can tell a sponsor what other plans pay without telling them what those plans receive. Fiduciary status establishes responsibilities and a process for making decisions, but it doesn't establish what a particular service should cost. An audit can establish compliance without establishing that the compensation reflects the work performed. The sponsor can therefore have several reasons to feel comfortable with an arrangement without ever having established that it represents a good deal.
The absence of a conventional invoice is part of the problem, but the conversations suggest that the issue goes further. Sponsors have the information necessary to ask many of these questions. They can see the plan's assets. They can see the fees reported on the Form 5500. They can ask their advisor how much time was spent. They can ask what services were provided. They can request competing proposals. They can ask that compensation be reduced or moved to an employer-paid arrangement. Yet having access to information doesn't necessarily cause someone to act on it.
That is one of the clearest pieces of evidence in my records. I have had sponsors receive detailed information about their fees and still do nothing. I have had sponsors acknowledge that the amounts were significant and still not follow up. I have had sponsors who knew the advisor's services were minimal continue paying the fee. I have had sponsors who were given a straightforward opportunity to ask an existing provider for a reduction decide that making the change was not worth their time. The behavioral record is remarkably consistent across the years and across different kinds of plans.
The industry structure helps make that behavior possible. When compensation is deducted automatically from participant accounts, the sponsor doesn't experience the payment in the same way as an ordinary business expense. When compensation increases automatically as assets increase, the sponsor doesn't necessarily experience the increase as a new purchasing decision. When the advisor is someone the sponsor has trusted for years, questioning the economics of the relationship can feel much more consequential than questioning a vendor's invoice.
My database gives me something I don't think is available anywhere else in this form. The Form 5500 filings provide the financial record that led me to many of these conversations, while the contemporaneous records of the conversations provide the human response to those numbers. The combination allows me to look at the same issue from both sides by seeing what the plan was paying and what happened when someone asked the person responsible for the plan to think about that payment differently.
After more than 7,000 conversations, I have heard many explanations for why a sponsor trusts an advisor. I have heard far fewer explanations of how the sponsor established that the compensation was reasonable relative to the services, the time involved, comparable market pricing and the value being received by participants.