Fee Models Are Shifting
Two common fee models that are used by retirement plan advisers are flat, or standard, fees and project-based fees. In the flat-fee model, one fee covers all of the various services the adviser provides for a sponsor client. With a project-based model, there might be a small standard charge for basic services, but most of the adviser’s compensation comes from charging for each service, or project, rendered. This has been called “a la carte” pricing.
Just 10% of the clients of advisers who responded to the 2020 PLANADVISER Practice Benchmarking Survey were on a fixed, project-based fee model, but, anecdotally, that tide is shifting.
Ryan Gardner, managing partner, head of defined contribution (DC) at Fiducient Advisors in Windsor, Connecticut, says “per project” is not how his firm prices clients; it uses a flat fee based on plan size—what he calls “retainer pricing.” He says any firm should know the time and amount of complexity involved in serving a client of a certain size.
“Putting aside size and complexity, the way we think about retainer pricing is that we want to be our clients’ first call. We don’t want them to worry about extra fees for a call or for figuring out solutions for a special problem,” says Gardner, to elaborate on the reasoning for this fee model. “Our goal is to serve as a strategic adviser.”
Gardner says his firm’s fee includes everything from regular quarterly meetings and whatever extra meetings are needed, to quarterly reporting and a governance calendar, annual fiduciary training for committees, annual recordkeeping and fee benchmarking, and a review of the markets. “We help them create the right fiduciary trail, and we look at all key elements of their plan to make sure it is competitive,” he says.
The advantage of this simple fee model for clients is that it eliminates the unknown, Gardner says. “Many clients budget for provider fees, whether paid by plan assets or by the sponsor, so they need to know roughly what the [adviser] fee is each year,” he says. “If fees are paid by the plan, it will affect participants. If they are paid by the sponsor, they will need to be included in a budget.”
There are a few service exceptions for Fiducient’s model; Gardner says these are common extras in the plan adviser industry. For example, his firm charges an additional fee for participant education. “For a client that would want us to come out quarterly to meet with participants, we might charge a fee of $1,500 per day,” he says. There would also be a separate charge for issuing a request for proposals (RFP) for finding a new plan provider—a lengthy process that includes crafting the RFP questions to address the plan sponsor’s needs, scoring responses and holding finalist meetings. “Beyond that, there are not many things clients could ask for help with that would incur an additional fee.”
Joe DeBello, managing consultant at OneDigital in Orlando, Florida, previously used the standard-fee approach, with “no line drawn in the sand” about what was in scope or out of scope for services; it included investment benchmarking and RFPs.
Charging a standard fee lets firms eliminate the need to continually rethink what is a core service, DeBello says. A challenge though, he notes, is that, historically, increases on flat fees have been few and far between, so charging for one-off events—e.g., performing pre-merger-and-acquisition (M&A) due diligence or creating custom communications—is a way for advisers to ensure they get properly paid. “[Even] if a firm believes it won’t have many one-off events—say, if it serves mostly small-plan sponsor clients—it might make more sense to charge a standard fee,” he says.
OneDigital is moving toward defining a core set of services, for which it will charge a defined, non-asset-based advisory fee. It will list separately other, commonly requested, services, with the fee it is charging for each. “This would be determined on an office-by-office or adviser-by-adviser basis, while we all operate off the same contracts or agreement,” DeBello says.
“Collectively, practice leaders spend a lot of time together discussing best practices and the changing marketplace,” he continues, “and there’s been much agreement across offices on clearly defining ‘in scope’ versus ‘out of scope,’ and ensuring the time spent on extra project work gets properly billed to the plan sponsor.” He adds that M&A activity, currently at an all-time high, has added to the workload of many consulting teams.
With a per-project fee model, there might be one fee for core services, which include drawing up an investment policy statement (IPS), producing quarterly reports and meeting with the committee on some regular basis, plus other fiduciary support services such as plan provider fee benchmarking. The per-project pricing comes in for services above that, Gardner says. The difference between this fee model and a flat-fee model is that, in this one, fewer services are considered core; more fall under the “per-project” heading.
A per-project fee model would charge for recordkeeper searches, participant education, extra committee meetings or calls, an investment manager search, and regular recordkeeper due diligence by, for example, issuing a request for information (RFI).
Another area that generally demands an extra fee is adviser managed account solutions. “I think this will likely evolve over the years with the continued adoption of these by plan sponsors,” DeBello says.
From OneDigital’s vantage point, asset size does not necessarily dictate complexity, DeBello says. “We consider ourselves a full-service consulting firm that’s not just focused on investment advising but also on day-to-day plan administration. Complexity generally has more to do with whether a client has multiple locations or multiple plans,” he says. “Size might have some bearing on it, but we’re looking at hours spent serving our clients.”
Both advisers agree that simplicity in fee models helps sponsors, if they know what requests they will pay a fee for. The average plan generally does not have one-off events, he says, but it can be hard to gauge what activity level there will be, especially with a new client. “The concern for advisers is underpricing when the demand on their time might be higher than anticipated. That’s the downside of charging a standard fee,” DeBello says. “That’s why we’re hearing from OneDigital colleagues and other firms that they are going to start charging for different services.”
OneDigital is trying to use efficiencies that make a per-project fee model less complex for clients. “We’re trying to standardize project-based work versus core services,” DeBello explains. “In our service agreements, we list core services in language that clients will understand. We might provide a calendar of core services then outline in the agreement some of the most common add-on services such as targeted communications or HSA [health savings account] education. We don’t provide a laundry list of anything that can happen but a list of the most common items that would not be included in our core fee.”
Variations in Fee Models
There are still firms that charge fees based on plan assets, says Gardner. He says he believes asset-based fees are primarily charged by firms in the smaller end of the market. In last year’s PLANADVISER Practice Benchmarking Survey, across all respondents, two-thirds (67%) of their clients paid some sort of asset-based fees.
For large and mega plans—for which 3(38) investment management has become more popular, Gardner says—that service might be priced based on plan asset size, as well.
However, DeBello says, he has seen a combination of a standard fee-for-service with a smaller asset-based fee to compensate advisers for additional projects.
He says he had an interesting conversation with an adviser about fee models. The adviser uses a flat-fee model but said, had he not worked with sponsors to establish regular cost-of-living increases, he might have used a different model. “Building in cost-of-living increases on fixed amounts that way will become the norm,” DeBello says.
Art by Gizem Vural