Drivers Of Increased Scrutiny On Advisor Fees And Services
Here at Retirement Planology, we’ve been seeing an increase in RFPs, as have many of our colleagues, so much so it made our trade magazines and Fidelity’s most recent retirement plan sponsor survey. What’s driving this increase, and what might plan sponsors want to consider for their plan?
In March, there was an article published by Plan Advisor magazine titled “Retirement Advisers See Increased Scrutiny on Fees, Services,” which listed reasons as to why plan sponsors are increasingly shopping around for a new advisor. Here’s my take on these reasons.
CONSOLIDATION: MERGERS AND ACQUISITIONS
We have seen a lot of merger and acquisition activity in many areas of the retirement plan landscape. You’re probably already aware of consolidation in the recordkeeping space, with probably the most recent/well known including Empower gobbling up Prudential and MassMutual, and Principal buying Wells Fargo. Acensus has been on a buying spree of third party administrators since 2017, now boasting 42 locations.
We’re also seeing the same thing in the retirement plan advisor space. There are several factors driving this:
The aging population of advisory firm owners - According to a 2019 J.D. Power study, the average age of a financial advisor is about 55 years old, with about one-fifth of industry professionals being 65 or older. Many owners are looking for a succession or exit strategy, and with a huge infusion of private equity money, are opting to sell the business either upon or positioning for retirement. Others are choosing to join forces with larger firms in the hopes of creating more career opportunities for their employees and clients.
Insurance companies are expanding into other areas, retirement plan advisory services - Also fueled by private equity, we have seen the rise of large property and casualty and life and benefits insurance firms made from consolidating smaller benefits firms. There is a cross-selling opportunity for insurance companies that purchase retirement plan advisory firms; it’s a specialized niche that many insurance companies would love to have in their portfolio of services to scoop up all company benefits.
The benefits of size and scaling up - About 80% of retirement plan advisory practices hover around 4 employees. A quick check on NAPA’s Top Advisor Teams will confirm those numbers. There are benefits to being part of a bigger firm, such as greater access to tools and resources, discounts on software and compliance services, and so on.
So what happens if your plan’s retirement advisor practice is acquired by another company? Do you retain the individual advisors you had before, or will you be assigned someone else to handle your account? Will you get the same level of services delivered the same way as before? This is why many plan sponsors are taking a look at what they get starting with the change in firm ownership and what’s available in the marketplace so they can have a fair comparison of fees and services. It’s also an ideal time to refresh and get an idea of what they actually need for their retirement plan.
COMPETITIVE FEES
It used to be that non-specialist advisors or brokers could get away with charging high fees (read: those that are more commensurate with what you see in wealth management) that would generally be ignored by plan sponsors, but that’s simply not the case anymore. The prevalence of lawsuits regarding fees combined with plan sponsors knowing their responsibilities and paying more attention to what they’re paying has reduced the amount of overcharging. There’s also the fact that non-specialists are leaving the retirement plan space for wealth management and financial planning, also resulting in more reasonable fees for actual work being performed.
Despite all the additional work that we’ve seen come our way from new legislation as well as best practices, retirement plan advisors are becoming more efficient, and offering services that the market demands and clients are willing to pay [reasonable fees] for. Fee compression is real in this area.
THE SERVICE LANDSCAPE
The service landscape has changed in offerings and delivery. Let’s look at financial wellness as an example. Financial wellness could involve many things: onsite or virtual employee classes, specialized software programs, video series, and topics targeting investing, saving, budgeting, insurance, saving for college, you name it. The type of participant education/financial wellness offerings available varies widely from advisor to advisor, as does the overlap with the recordkeeper and other service provider offerings. You could have these wellness programs as included in your advisory fee, separate from your advisory fee, priced per company, employee, per employee that participates in it, the list goes on.
Investment services probably haven't changed that much, although other factors such as ESG investing and in-plan retirement income have added a layer of complexity to these services. However, many providers are now adding managed accounts to their offerings, where participants can get additional, personalized investment management services for an added fee.
The level of involvement of a retirement plan advisor can also vary dramatically from one practice to the next. Some advisors (like us!) get involved when there are issues to sort with the recordkeeper, looking at the 5500, reminders and prompts for upcoming deadlines, versus those that solely provide investment monitoring and reports. This is another reason many plan sponsors are browsing the advisor marketplace – to see what other services other retirement plan advisors offer that they can take advantage of.
LITIGATION RISK
Litigation risk has always existed and will continue to do so for the foreseeable future. This risk is encouraging retirement plan sponsors to show concrete evidence that they are doing right by the plan by evaluating the service providers and their fees. The DOL has a great tip sheet on selecting and monitoring your service providers (retirement advisors are included here), and they expect you to do that on a periodic basis.
How likely are you to get sued? Probably not super likely, unless you’re just ignoring your duties under ERISA. Larger plans are generally a larger target. But, a good retirement plan advisor will help you do things by the prevailing best practices. They also take on risk for overseeing the investments in the plan. I’ll make a quick point here that occasionally someone will say there’s very little difference in the work performed for certain size plans. The difference is that larger plans are a larger target, and therefore the advisor absorbs more risk. That risk has a cost, so you should expect to see higher fees paid in some cases despite the work amount being similar.
If you’re shopping around for a new retirement plan advisor for any (or all) of the above reasons, consider us! We help plan sponsors navigate the retirement plan maze – typically the ones who are buried with too many responsibilities and want to get the retirement plan off of their to-do list, want advice about warning signs and how to fix them, want support for their employees to make good decisions, and who need to offer the same benefits as their competitors within their constrained benefits budget. Reach out to us here or email us at hello@retirementplanology.com.