Practice Management February 4, 2022

Adviser Industry Fee Pressures in Focus

As competition heats up and clients expect more for their fees, forward-thinking advisers are focused on both protecting existing revenue sources and adding new revenue streams.
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PA-012822 Adviser Fees in 2022_ Lorenzo Gritti-web

Art by Lorenzo Gritti

Fee compression has impacted adviser revenue models for several years now, thanks to such forces as increasing automation, stiffer competition and ongoing industry consolidation. Experts say these trends are set to continue throughout 2022, leaving forward-thinking advisers focused on protecting existing revenue and adding new revenue streams.

“Just like the recordkeepers, advisers have seen a trend over the years, as our fees are constantly being benchmarked to other firms that do the same work,” says Ryan Gardner, managing partner and head of defined contribution (DC) at Fiducient Advisors in Windsor, Connecticut. “Over time, it becomes harder to charge more for certain services due to the competitive pressures in the marketplace.”

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One reason there has been so much pressure on fees, says David Swallow, managing director of consultant relations and retention at TIAA in Tampa, Florida, is the commoditization of some of the work that advisers have traditionally done. Examples of this include portfolio construction and investment monitoring, among others.

“Those services have become pretty much the standard offer that you can get from anybody that’s an investment adviser,” Swallow says.

The fee compression is leading some advisers to look for ways to differentiate themselves, via the types of services they offer, while also growing revenue. For some plan advisers, that growth is organic, but others are looking to mergers and acquisitions (M&As) to scale up quickly in order to remain competitive and justify their rates.

Swallow says the M&A boom in the retirement industry will likely continue in 2022, so its impact on fees will continue as well.

“You’re seeing more of the smaller, boutique-type firms looking to potentially join with larger firms that have other lines of business or other areas that they can leverage, so that they can grow their revenue with the client base that they have,” Swallow says.

Such consolidation is, in turn, driving greater efficiencies and lowering overhead costs, putting even further pressure on fees, Swallow says.

Broadening Services for Added Value

Greg Fiore, senior vice president at OneDigital in Atlanta, says many advisers are broadening the scope of their work to both add value to the client and to potentially bring in more revenue. Those advisers are leaning into their role as a consultant, taking on many plan management tasks, such as making sure that the plan meets filing deadline, helping with plan design strategy and conducting educational meetings with participants.

“Once you build that trust at the client level and provide that kind of service, [clients] are asking you to come back and do other things, like look at student loans, or health savings accounts [HSAs], or emergency savings,” Fiore says. “And that work can be more contract-based, paying project fees.”

Swallow says advisers have plenty of opportunities  to expand the products and services they offer clients.

“One of the areas that we have seen a focus on from legacy institutional consultants has been offering some type of participant advice service,” Swallow says. “Those firms see offering wealth management to participants as a way to generate additional fees.”

In addition, advisers can generate fees by providing guidance to clients on new regulations and how potential changes might impact their plans. That includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which has many provisions plan sponsors are still considering, and may also include SECURE 2.0, aka the Securing a Strong Retirement Act, which some expect to make its way through Congress this year.

Advisers are also charging project fees for specific, one-off services they provide, such as helping a client through the request for proposals (RFP) process, reviewing their plan documents or providing support as they combine plans after a merger.

Those charges are on top of the retainer fees that most advisers still charge, as either a percentage of assets under management (AUM) or a flat fee based on plan size. The 2020 PLANADVISER Practice Benchmarking Survey found that two-thirds of clients still pay their adviser on an asset-based fee schedule.

Away From Commissions

In general, Fiore says, plan advisers are moving away from commission-based structures, as more plan sponsors express a desire to hire fiduciaries.

“It’s very rare to see broker/dealers [B/Ds] involved in 401(k) plans anymore,” Fiore says. “In fact, most reps are freezing their broker/dealer licenses.”

Ellen Lander, principal at Renaissance Benefit Advisors Group in New York City, says her firm sticks to a flat-rate fee schedule, which makes sense for all but the smallest plan sponsors (which are not in her client base).

“Adviser work is exponentially greater than it used to be,” she explains. “The amount of work we do is crazy. That means that the amount of hours that we need to spend just doesn’t relate to a percentage of assets.”

The glut of recent fee-related lawsuits against plans has also prompted additional discussions between plan sponsors and their advisers on the role that fees pay in their plans.

There have been nearly 150 Employee Retirement Income Security Act (ERISA) excessive fee lawsuits over the past two years, according to Goodwin Procter law firm, and the suits have already begun piling up in 2022. PPL Corp. and Mass Brigham General are among the companies that have already received such a suit in the new year.

“That litigation has recentered the discussion on fees and created quite a bit more urgency for plan sponsors to look at their fees,” Gardner says. “They need to make sure that both the level of the fee is reasonable, and how it is being applied is equitable. Participants are much more aware of the fees that they’re paying than they were five or six years ago.”

Benchmarking Plan Fees

In addition to making sure their own fees are in line with industry norms, advisers can also use these fee conversations to provide additional services to plan sponsors.

“It the adviser is good, he’s going to do a market search every three years for the client,” Fiore says. “Even if the client is happy with its recordkeeper, we want to make sure that the fees it’s paying are reasonable.”

It’s also important for advisers to monitor such lawsuits to understand the tactics attorneys are using to file suit against plan sponsors, and to explain these trends to committees. Those lawsuits essentially offer a road map that committees can follow to protect themselves from similar cases, Gardner says.

Lander says continually evaluating fees also makes sense as a plan evolves in terms of both demographics and asset size. She reminds clients concerned about lawsuits that reasonable “does not mean cheap,” but rather should reflect the level of service and expertise the plan sponsor is receiving. Beyond that, she emphasizes the importance of transparency on which (if any) fees participants are paying.

“If the fees are either a flat-dollar fee or a flat percentage for every participant, you need to be upfront about what those fees are and why they’re being paid,” Lander adds.

More Communication

Being upfront may require specific communication from the plan sponsors on fees, separate from the recordkeeper’s fee disclosures, with a detailed description about what that fee covers.

“Transparency equals trust,” Lander says. “Participants will probably trust you more if they understand why fees are being paid, and what they are paying for.”

Lander helps her clients conduct annual fee analyses to ensure fees are reasonable. In addition to looking at adviser and recordkeeping fees, those analyses also take a close look at the investment menu itself, making sure there aren’t any new lower-class share classes, for example, that a plan might be able to access to lower the fees for participants.

Documenting discussions on all of these topics can prevent future fee-related lawsuits—or serve as a defense against fee lawsuits, Lander says.

“You want to document what you looked at and why you made the decision that you did on fees,” Lander says. “We believe that keep the litigators away. They can’t say ‘Why didn’t you do this?’ because we can show them the documentation and the rational reason why we didn’t do what they’re suggesting.”

The Markets February 3, 2022

How Advisers Can Help Low-Income Workers Save in Employer-Sponsored Plans

Financial wellness campaigns that explain the benefits of delaying Social Security until full retirement age can also help low- and moderate-income workers improve their retirement readiness.
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Social Security is more important for low- and moderate-income (LMI) earners’ retirement than it is for higher-income workers because the benefit is expected to replace a greater share of their lifetime earnings, according to Rich Johnson, senior fellow and director of the Program on Retirement Policy at the Urban Institute, a Washington, D.C.-based think-tank for economic and social policy research.

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“It’s not that their benefits are higher than [they are] for higher-income workers,” he says. “It’s that Social Security will replace a larger share of lifetime earnings for lower-income people than for higher-income people. Because higher-income people tend to invest more in retirement plans outside of Social Security, they have other sources of income from investments and those other sources are more important, while Social Security is a smaller share of their total income at older ages.”

Changes the Social Security Administration has made—to gradually push the age for collecting full Social Security benefits to 67 from 65—could reduce the benefit’s importance for all workers, Johnson explains.

“Going forward though, it’s not clear that Social Security is going to be more important than it is today and, in fact, there’s some indication that it might be less important for workers at all levels,” he says.

Beneficiaries that retire at age 62 will receive 70% of full benefits, whereas “it used to be the case that if you retired at 62 you would get 80% of your full benefits,” Johnson says.

Social Security Communications

Plan sponsors and retirement plan advisers have many options when deciding how to include information about Social Security in communications to LMI participants to help them with their retirement readiness, but there are also challenges that come with those efforts, according to sources.

LMI participants could benefit from plan sponsors and retirement plan advisers placing more emphasis on understanding how the system works and where the benefit comes from, says Chuck Williams, CEO at Finspire, a Chicago-based corporate retirement planning consultant. In other words, information provided to LMI retirement plan participants on how to maximize the benefit could be improved, he says.

“People sometimes know maybe what it is, but those are really estimates and can be very far off on what the actual case is,” he says. “For plan recordkeepers, [it’s] having a more specific formula and guidance on not just where the estimate comes from in Social Security, but how do I maximize it?”

Beneficiaries can begin to claim Social Security benefits starting at age 62. However, an individual is entitled to full benefits at the full retirement age of 67. Claimants that begin Social Security early will receive reduced amounts by a small percent for each month before the full retirement age is reached.

“One of the bigger mistakes people make is starting Social Security early,” Williams says.

Participants need assistance to make the optimal choice for when to begin claiming benefits, with education that highlights the benefits of delaying, he adds.

“[It’s] really educating them on that benefit of waiting and improving Social Security, improving their fixed income in retirement, and also incenting them to save more so that they can delay Social Security until later on,” Williams says. “Tying that in to understanding of ‘How do I maximize that Social Security’ versus just giving them a rough guideline of what it is and then maximizing the impact of that is really key. That is not really getting conveyed enough.”

Williams adds that most existing education is general advice and not tailored to LMI participants’ needs.

Boosting LMI Savings

Because LMI workers will have to rely on Social Security to replace larger portions of their income than other workers, plan sponsors and advisers can also encourage them boost to their retirement readiness by saving in an employer-sponsored retirement plan.

“The best thing an employer can do is to offer financial planning for these employees,” says Warren Cormier, executive director of the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center (RRC).

Personalized financial advice for LMI workers, automatic enrollment that is paired with auto-escalation, and financial wellness programming tailored to challenges for these participants are impactful approaches, Williams adds.

“If you can eliminate those obstacles and get them education to improve their overall financial health [by] paying down debt and building an emergency savings, you can get on that path to retirement,” he says.

Advisers can help LMI workers by reaffirming the critical importance of contributing to an employer-sponsored retirement plan with ongoing financial education, says Greg Adams, consultant at Fiducient Advisors.

“Doing some financial education just once isn’t going to get it done,” he says. “You get a little bit of a decreasing return every time you do one of these, but each time you might hit on something a little bit different for somebody else.”

Adams advises annual financial wellness campaigns for participants. “This can be done a whole bunch of different ways: in-person, virtual webinars, seminars, recordings, information posted on a company intranet site—[there are] a lot of different ways you can try to reach participants,” he says.

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