Monitoring Your CAP Advisor

Sizing up fees, performance and fiduciary issues.

August 8, 2011

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This is the  fourth installment in my five-part series on fees and performance in defined contribution (DC) plans. In this post I discuss CAP advisor fees and performance. Many smaller plan sponsors use an advisor (an agent or broker of record) to assist their CAP members without understanding what to consider in evaluating performance. Sponsors also need to ensure that the advisor is doing only what has been authorized.

Advisors provide four  basic areas of service:  member retirement planning, assisting with financial education,  investment advice and sponsor governance assistance. Retirement planning support is provided by the record keeper in the form of information and tools that help members in understanding investment concepts, identifying their risk tolerance and selecting an appropriate asset mix. However, sponsors recognize that some members simply don’t have the time and prefer to use an advisor to ensure they have considered all the elements of retirement planning.

Are they offering advice?

Advisors however may also go a step further and provide advice in addition to asset mix recommendations such as which investment option to use and when. Investment advice may benefit some members but results in  additional potential legal and financial risks for the sponsor.  In some cases the sponsor may also rely on the advisor to assist in governance and selecting investment options or provide reporting to assistance  in administering the plan, all of which should also  be considered in the evaluation.

Section 3.4 of the CAP Guidelines recommends that sponsors, in choosing or referring members to an investment advisor should ensure the advisor has an appropriate level of knowledge, expertise and should be independent of any other service providers. Section 6.2 of the CAP Guidelines also recommends that sponsors clearly establish the criteria used in selecting the advisor and periodically use it as information in reviewing an advisor’s performance.

In some cases sponsors are not even aware that the advisor is providing investment advice — a risk from a governance and fiduciary perspective. While offering investment advice may appear to be a good idea, plan sponsors tend to shy away from it because of the added fiduciary responsibilities and legal risks.

The objective in monitoring and assessing the advisor’s performance is important for a number of reasons and should be done formally and on a regular basis to ensure all (and only) the services agreed to are being satisfactorily delivered and at a reasonable cost.

Advisor Fees

The fees for the advisor’s services are applied to all investment options (excluding Guaranteed Investments (GIs) and daily interest investment options) as a part of total composite paid members. Advisor fees of 0.3% to 0.9%, depending on the size of the plan, are not uncommon and often represent a substantial portion of the total cost paid by the members. Members with investments of $100,000 -$400,000 may pay $300 -$3,600 annually for advisory service over their working life.

The advisor fees are paid regardless of whether or not a member uses the advisory service. The amount the advisor receives also automatically increases annually as the amount of the member’s investments increase through contributions, earnings or increases in the market value. The advisor may also earn fees from a group benefit plan if applicable.

Members who only or  primarily invest in GIs or daily interest accounts but make use of the advisor services are getting these services at little or no cost. Conversely members invested in equity and fixed income-type otions may not use the services of the advisor but pay the cost.


Evaluating an advisor’s service performance can be a difficult qualitative exercise because information on member usage and the type of service provided is often limited or doesn’t exist. Direct feedback from members, the administrator or surveys can be useful in assessing performance but may be costly and difficult to interpret. Assessing the quality of actual investment advice is also a challenging task, which will require specific information and member feedback.

In some cases the advisor fees are not disclosed separately and neither the sponsor nor member is aware of the actual annual cost.

Therefore a good starting point in evaluating advisor performance is to request the amount of fees the advisor actually receives each year and obtain information on the type and quality of services provided to the members. In other words, the sponsor should understand what services are being provided by the advisor and to whom as well as whether or not the costs are reasonable. Providing the advisor with a list of information needs and a reporting format is necessary in most cases. Increases in the amount the advisor actually receives year-over-year should also be explained and justified  (i.e., is there more or better service?).

In summary, there is nothing wrong with providing CAP members investment advice through an advisor but it’s important to understand the additional fiduciary responsibilities, risks and to understand who is paying the cost. Sponsors should ensure that an advisor is not providing CAP members with investment advice unless this has specifically been authorized.

Because of the nature of the relationship with certain service providers it is advisable to have an experienced and impartial consultant assist in evaluating the performance of the record keeper.

In Part V of this series, I will discuss fees and performance issues relating to equal treatment of plan members and  fee issues to consider when converting from a DB to DC plans.

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I have received feedback from others as well that the fees they receive are closer to 0.25% vs.0.3% -0.9% range mentioned. My experience is that that for plans with assets of less than $20 million the rate the members paid for advisor fees was significantly greater than 0.25% and for plans with assets of $40-50 million they were about 0.3%. However, if the member assets in the plan are low and there are a large number of members a fee of 0.9% (as observed by others) may well be appropriate. The risk is that as the plan assets grow the rate remains unchanged which is why it was suggested that the sponsor should ask for (few do) and know how much the fund manager, record keeper and advisor actually receive each annually which should improve the likelihood that fees will be reduced as the value of the assets increase . Focusing on whether the rate it’s 0.25% or 0.9% however is a bit of a red herring. The point is how much did the plan members pay and what service did they get in return. If it’s a $50 million plan (with no or negligible investments in GIs) and the members pay the 0.25%, the advisor receives approximately $125,000 annually (plus a small fee on the GIs and variable investments and fees on external transfers into the plan from the record keeper). If there are, say 600 members in the plan, but only 15%-20% (say 120 members) make use of the of advisor services you are in a situation where all the members are paying about $125,000 for advisor service to a few of the members. It is debatable whether this is fair or reasonable for all members. Rather than the members paying the advisor fee based asset values the better approach from a governance perspective would be for the sponsor to pay the advisor (and the record keeper fee for that matter) based on usage. For example if there are 600 members in the plan and approximately 15% -20% use the advisor’s service an amount of say $3000 per month plus an additional payment for seminars would be negotiated annually as part of the service provider performance review by the sponsor . With regard to the value to the members of advisor assistance I don’t think anyone would disagree that there is a significant value for some members to have someone available to talk to, explain the information and tools and assist retirement planning process provided by the record keeper and in selecting an appropriate asset mix. Intuitively, a member with limited time or knowledge struggling to understand financial, jargon, the retirement planning and investment process should benefit from the assistance of an advisor and result in an “improved outcome”. If the advisor is also providing investment advice (but many sponsors are reluctant to authorize the advisor or record keeper to do this) there may also do better in terms of risk and return performance. Thank you for the feedback I appreciate your comments and insight on this rather opaque aspect of fees.


Gerry as much as I would like to have the income from a compensation scale of .90% you are obviously out of touch with the compensation levels most dedicated Pension advisors are charging on an ongoing basis. The .30% would apply to smaller size accounts and there may be a fee levied on cash flow as well in the early years in order to offset start up costs but your premise is flawed and I would be interested to know the source of your commission benchmarks. Asset based compensation in the .20 to .25% range might be more normal as fund sizes exceed $ 5 million. As the fund size grow fees need to be kept in line with the services provided and expectations of the clients. Advice has also been shown to improve outcomes for plan members and by legislation advisors are licensed and have significant Insurance coverage for E&OE issues so the fiduciary liability risk would appear small at best particularly in light of the small amount of DC litigation in this country to date.

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