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I got my 401(k) fee disclosures so what do I do now?
By Louis S. Harvey, CEO Dalbar, Inc. on Jul 02, 2012

Plan sponsors have been told that they must now establish that the price their plan pays is lower that the average. While this might seem reasonable at first glance, it is not only unreasonable but insane. The idea of all plans being priced below average is a mathematical impossibility. (I refer to this idea as the “401(k)begone”, after the famous Lake Woebegone where all the children are above average) Obviously, there is likely to be as many plans above average as there are below, so how do you ever know what a reasonable price is?

Under ERISA 408(b)(2) plan sponsors (as responsible plan fiduciaries) must establish that plan services are necessary, reasonable and the price participants pay is  reasonably aligned with the services delivered. This must be done through a prudent process.

Seeking a below average price is more of a fool’s errand than a prudent process.

The approach we have taken to this requirement is to apply the principles used to set the price for a business entity that includes both quantitative factors (such as earnings and revenue) and qualitative factors imbedded in the earnings multiple or revenue multiple. Just like the price of a business, a 401(k) plan has a reasonable target price that can be developed based on the value of the plan to the “buyers”, who are the participants paying the fees.

Dalbar’s Target Price calculation starts with a simple average that we refer to as an Index Price or Statistical Benchmark. This is the equivalent of valuing a business, starting with the earnings multiple for the industry. As with business valuation, the Index Price is raised by positive factors and lowered by negative factors.

Four categories of factors are used to raise or lower the Index Price. The first is a forecast of the plan’s likelihood of achieving the participant’s retirement goals. We call this forecast, “Success”. The second set of factors that affect the Index Price is the current needs and preferences of plan sponsors and participants. The third set of factors is the risk factors such regulatory compliance, fiduciary and litigation risk. The fourth set of factors is the specific services being provided to the plan.

These factors are weighed based on plan sponsor input and used to calculate the Target Price for each specific plan. The price currently being paid or being proposed is considered unreasonable if it exceeds the Target Price plus the cost of converting.

You can click here to start your prudent process of completing a plan profile or e-mail for more information on Certification of Reasonableness of Plan Services or for a referral to a Fee Disclosure Expert.


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Louis S. Harvey
President & CEO



Founder and leader of Dalbar, Lou Harvey is relentless in the search for the forces that are shaping the world of financial services today, tomorrow and for years hence. Using Dalbar’s research capabilities, Lou Harvey seeks insights from inside and outside the industry to understand and anticipate changes in customers’ needs and the ways products are distributed.


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