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A vital question individuals must ask when considering their consultant is: How is the consultant being paid?

If you think of a consultant as a financial planner for plan sponsors, it makes for an easy comparison. If a financial planner is a fee-only provider, there is less chance that the information will be biased in any way. Likewise with consulting firms: If they are paid directly by the employer by fees and not commissions that are often bundled together, the potential for excessive fees is smaller than if they get paid via commissions from money managers in the form of 12b-1 fees, finder's fees or soft-dollar commissions. Many of these costs are "bundled" together, making it difficult for individuals and sponsors to know how much money goes where, said Ward Harris of McHenry Consulting Group. (

Click here to read a story on how high, hidden fees eat into your 401(k) plan).

In the 1990s, for instance, a

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Securities and Exchange Commission

audit of DeMarche found that the consultant charged pension funds that were soft-dollar clients twice as much as clients who paid in cash. DeMarche settled the allegations that it failed to properly disclose its fees without admitting or denying guilt.

Investigations by Ted Siedle, former SEC attorney and mutual fund executive, meanwhile, have found that consultants may charge some clients fees as much as four times higher than other clients -- and plan providers have little idea whether they are paying too much. While Siedle's investigations are in the defined-benefit arena (pension funds), he noted that many of the same problems exist within defined-contribution plans such as 401(k)s.

"The plan sponsor should pay all the expenses to a fee-only consultant -- that's how you avoid conflicts," said Steve Lansing, founder of Orlando, Fla.-based fee-only consultant Sentinel Financial Services. "In small plans, that's just not doable. Any plan with over $10 million of assets has enough that all these people can be paid. You could get all this stuff done for 125 basis points. In many cases, this should be below 75 basis points."

The best way for sponsors -- and participants -- to make sure they are getting a fair price is to have their consultant sign a disclosure form that details all of the relationships they have with money managers, how they generate revenue and who pays for precisely what services when it comes to their 401(k) plan.