Advisers Can Help Plan Sponsors Save on Fees

Some advisers say retirement plan fees can be reduced by as much as 50%.

Advisers have the ability to reduce a retirement plan’s fees by as much as 50%, says Julie Ward, vice president, consulting at NFP’s retirement division in Aliso Viejo, California.

Nathan Boxx, a financial adviser at Fort Pitt Capital Group in Pittsburgh, Pennsylvania, agrees, but thinks there is the potential for even greater reductions: “In my experience, particularly for plans that have not been looked at for a number of years, you can take overall expenses from 4% all the way down to 1% to 2%, making this a significant savings because these plans were not properly managed or given good advice from their previous adviser. However, even making a one basis point savings over a 20-year period can be the difference between a participant retiring at age 65 or 70.”

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Ward explains, “A savings of 1bps on any portion of the plan fees is calculated based on the size of the plan based on assets. For example a 1bps (.01%) fee reduction on a $1,000,000 plan would be $100. A 1bps fee savings on a $100,000,000 plan would be $10,000.  It is relative to the plan size in terms of the savings in dollars. The larger the plan, the greater the dollar amount and impact.”

Mike Zovistoski, managing director at UHY Advisors NY, Inc., in Albany, New York, further explains that if a plan has $1 million in assets, a 1 basis point (1bps) reduction is $100, and if there are 20 participants in the plan, on average, each participant would save $5 a year.

Ward says it is important to look at both the percentage savings and dollar amount savings in context with the plan size, demographics and service needs.

There are four main areas advisers should pay attention to with regards to a retirement plan’s fees, says Zovistoski: investment, recordkeeping, third-party administration (TPA) and adviser.

Right now, sponsors are very aware of the need to find the lowest share class option for the mutual funds on their platform, Zovistoski says. “Once you have a fund lineup with the lowest share class possible for the size of the plan, in terms of assets, as the plan continues to grow in size, even lower share class funds may become available,” he says. While a plan may not review its recordkeeping fees until three or four years have passed, it probably should review its investment share class prices annually, Ward says.

NEXT: Service provider fees

The recordkeeping fees concern the cost of delivering information to participants—through quarterly statements, call centers and websites, Zovistoski says. Just like with the investment fees, “as the plan grows, those fees can be renegotiated,” he says. “It makes sense for the adviser to keep in contact with the recordkeeper to find out if they have developed a new platform with lower fees” as well as to issue a request for information (RFI) or request for proposal (RFP) to find out what the recordkeeper’s competitors have to offer, he says.

Work with the TPA should be reviewed at least every three years, since the Department of Labor (DOL) inevitably comes out with new regulations with that frequency, Zovistoski says. If there are changes that need to be made to the plan document, it is best to make them all at once, because the TPA charges each time the document is amended, he says. If there are options that the sponsor may want to consider in the future, such as making the plan a safe harbor plan, it is wise to put those options into the document so that there isn’t an additional charge down the line, he says.

Finally, the adviser fee is generally in the 25 basis point to 75 basis point range, he says. Many advisers set their fee low, knowing that the plan assets will grow over time. But after a number of years, it is the adviser’s responsibility to review his or her fee to ensure that it is fair, which might result in a 10- to 15-basis point reduction, he says. On the other hand, as the DOL imposes more and more regulations on retirement plans, the risk to the adviser increases, he says. “You have to look long and hard at what your fees should be,” he says. “Look at each individual case.”

Boxx adds: “Keeping an eye on all of these fees is very important. There are several different layers.” However, it is also important to keep in mind the services being rendered for the price being paid, Ward notes.

Strategic Beta ETFs: Active or Passive?

Nearly two-thirds of ETF issuers claim to position strategic beta as a replacement for passive ETFs, but nearly two-thirds of advisers who are using strategic beta report replacing active mutual funds.

The latest Cerulli Associates reporting speaks of a fundamental “misalignment between ETF issuers and advisers on the use and implementation of strategic beta.”

Researchers warn that financial advisers’ implementation of strategic beta “differs from how issuers are advocating advisers use the products.”

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“Adviser use of strategic beta seems to be more focused on the notion of mitigating risk versus generating alpha,” states Jennifer Muzerall, associate director at Cerulli. “Just more than 60% of issuers assert they are positioning strategic beta to generate alpha, whereas the most-cited reason why advisers are using strategic beta is for downside risk protection.”

Strategic beta can achieve both investment objectives, but issuers’ messaging may not be resonating with advisers, Muzerall explains.

“Our findings from our latest ETF report reveal a huge education gap that issuers need to address,” continues Muzerall. “Issuers need to continue to develop their message to help advisers understand the benefits and uses of strategic beta. Cerulli’s research indicates that ETF issuers have a long way to go to increase strategic beta adoption among advisers.”

Much of the Cerulli analysis is written for the asset manager audience, but it shows how advisers have “turned to using ETFs as ‘building blocks’ within their portfolios and are attempting to generate alpha at the asset allocation level.” In other words, they are using ETFs for their low-cost beta exposure.

“Though performance has historically not been the biggest concern for advisers, it actually ranks highest among the attributes advisers consider when selecting an ETF,” Cerulli finds. “As ETFs continue to move away from being passive beta exposures, and more strategic beta and actively managed ETFs come to market, performance will become a bigger focus for advisers and issuers alike.”

Cerulli further reports how advisers who “are heavy ETF users and rely on investment models” are not directly making the underlying investment decisions: “Examples of these types of advisers would be wirehouse advisers who are using home-office ETF investment models.” This arrangement puts the emphasis on home-office decisionmakers, Cerulli explains.

Among advisers using ETFs, 57% say their usage rates are “always influenced by their own investment decisions,” while 41% of advisers are relying on “some sort of outside influence for their ETF use, whether it be their firms’ ETF model portfolios or firms’ recommended lists.”

“As more advisers eventually move to model structures to increase their efficiency, ETF issuers that had built out relationships with home-office broker/dealer teams for early product approval will be the beneficiaries,” Cerulli concludes.

These finding are taken from the report, “U.S. Exchange-Traded Fund Markets 2017: Differentiating Strategies for Sustained Growth.” Information about obtaining Cerulli research is available here

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