man cringing in giant trapPlan sponsors need to be mindful of what they're saying when theyfind themselves lured by low fees.(Photo: Shutterstock)

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Misdirection relies on the lazy eye. Or lazy brain. In eithercase, the magician masters the art of deception throughmisdirection: One hand draws the attention of the audience whilethe other furtively retrieves the device that appears like magic.Con men learn the same trick.

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When it comes to fees, 401(k) plan sponsors might want to readup on the magician's textbook (see “The Meat and Potatoes Topics of 401k Plan SponsorTraining: Fiduciary Education Curriculum (Part II),”FiduciaryNews.com, May 14, 2019). If they're not careful, they'lldiscover low fees may be the hand that deceives them. Followingthis false siren can leave them exposed to unwanted fiduciaryliability.

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The DOL was well aware of the potential ruse of low fees when itreleased the final version of its 2012 Fee Disclosure Rule.

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Well, to be honest, at first they weren't. I recall speaking tothem one afternoon shortly after they came out with the initialdraft of the rule. I asked, “So now the DOL is in the investmentmanagement business.”

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They had no idea what I meant.

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Before you get to the end of this piece, you'll find out what Itold them.

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I'll begin with the end. The DOL was careful, in its Final Rule,to remind plan sponsors to avoid chasing the lowest fee. The realmeasure wasn't the single dimension of fees, but themulti-dimension of fees and value. A fee in isolation meansnothing. A fee in combination with value derived meanseverything.

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Consider this: Which car offers more value, the one that's fullyloaded or the one that's stripped down? Certainly, the fully loadedmodel provides more value. If both cars cost the same, you'ddefinitely choose the fully loaded version. If the stripped-downversion cost a dollar less, you'd likely still pick the (highercost) fully loaded version. At some lower price point, you mightchoose the stripped-down car. That would entail a decision on yourpart that concludes the added features and benefits of the fullyloaded car aren't justified by its higher cost.

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This is the same exact thought process the DOL wants plansponsors to go through when they assess the value and cost of theplan service providers. A provider that offers higher value shouldbe selected when the fees are the same versus a provider thatoffers lesser value.

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If the lesser value provider costs a dollar less, it's stilllikely the plan sponsor should pick the high value (and high cost)provider. Failure to do so means the employees would receive lesservalue. Who's on the hook for this inferior value? The plan'ssponsor.

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In other words, hiring a lower cost provider that doesn'tprovide adequate value to the employee increases the plan sponsor'sfiduciary liability.

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There's another area where low prices can be deceiving. Thisalso explains how the DOL nearly inadvertently entered in theinvestment management business.

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When I spoke to them, I began by asking, “Should the plansponsor always choose the lowest fee?” They answered, “Ofcourse.”

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Those who know a bit about the pricing structure of the variousasset classes know where this is headed.

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Having lured them in with the primacy of lower fees, I thenconcluded, “So you're saying all 401(k) plans should only offermoney market funds.”

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“No, we're not saying that at all,” that quickly countered.

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“But you just said the plan sponsor should only select providerswith the lowest fees,” I explained. “Assuming we've eliminated allconflict-of-interest fees, money market funds have the lowestoperating costs. Bond funds have slightly higher costs. Equityfunds have the highest costs, with international funds topping thelist.”

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“That's not what we we're saying,” replied the now beleagueredDOL media contact. “That's not what we're saying at all.”

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Plan sponsors need to be mindful of what they're saying whenthey find themselves lured by low fees.

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It was never the fees.

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It was always the value.

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READ MORE:

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A 3-word fiduciary rule — Carosa

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The 'Fiduciary Rule' versus the 'Rule of Fiduciary'— Carosa

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Do you have the 'knows' to be a fiduciary? —Carosa

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Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).