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Financial Professionals: What is Considered “Reasonable” Compensation?

We are often asked the following question from investment professionals and recordkeepers – “How do I demonstrate that my compensation is reasonable?” Understanding and demonstrating the “reasonableness” of your compensation has come to the forefront of what plan sponsors now expect in evaluating financial professionals and other plan service providers because of the onset of the Department of Labor’s fee disclosure regulation. And there can be little doubt that the fee disclosure regulation will continue to garner a lot of attention.

What seems to be lost in all of the publicity surrounding these new disclosure requirements is that the mandate that service provider fees be reasonable has been a condition to exemptive relief under DOL’s 408(b)(2) regulation since the enactment of ERISA. In other words, while it may now be the case now that provider compensation needs to be disclosed, it has always been the case that the amount paid needs to be reasonable.

All of this begs the question – how can I prove that the compensation I receive satisfies the “reasonableness” test? Let’s answer the question by first reviewing what is not a factor in this analysis.

First, whether or not you make a profit or whether you lose money on any particular services arrangement is, for the most part, irrelevant. The business supporting the delivery of investment services may be run efficiently, in which case the margin of profit would be greater; or, it could be inefficient, in which case the profit margin would be slim or non-existent. Either way, the amount of profit earned is not important.

Second, if you are paid directly by your client, out of corporate or personal assets and not from the assets an employee benefit plan, no analysis of the reasonableness of the fees is required, at least for purposes of the 408(b)(2) regulation.

So, assuming you are paid out of plan assets and that a determination of the reasonableness of the fees must be made, how can you be sure the fees you receive are in fact reasonable? In general, what is deemed “reasonable” is based upon what you charge in comparison to what others would charge for the provision of similar services under comparable circumstances. In this way, your fees should be judged as to reasonableness in relation to what your competitors would charge for accomplishing the same level of work.

To be fair, it would not make sense to compare your investment services package against someone else who did not include within their package of services the same types of services you are providing. For example, if you provided an investment performance evaluation of 100 mutual funds and another provider furnished the same service but limited the number of funds to 25, it would not make sense to criticize your fee as being “excessive” without making a proper adjustment to the analysis to take into account your added level of work. While this may seem to be an overly simplistic comparison, a fair determination of reasonableness can only be made on an “apples to apples” basis.

That being said, at the end of the day you will want your fees to fit within a modest range of what other financial professionals would charge for similar services. In this way, when the disclosures mandated by the new 408(b)(2) regulation are reviewed by your plan sponsor clients, they will have no alternative but to determine that your fees are reasonable.


Stephen Saxon is a compensated attorney, is not affiliated with any company of the Principal Financial Group and the views he expresses are his own and not necessarily those of the Principal Financial Group or any member company.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

© 2013 Principal Financial Services, Inc.

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