The Great Race

Are you participating in the retirement plan industry’s infamous “race to the bottom”? The race has many more participants than spectators, and observers may find it is very difficult to stand on the sidelines. The race to the bottom refers to the fees advisers charge their clients—
all advisers have exposure to eroding fees within and among the individual markets where they conduct business.

Technology, media, competition, politicians and regulators all fuel the retirement plan industry’s journey toward ridiculously low pricing. However, those are only influencing forces. It takes an adviser to accept, implement and support the self-destructive behavior of charging less. Cannibalism from within our industry is currently leading advisers down a path of no return.

Know Your Services

Basic, yet vitally important, is the need for each retirement plan adviser to have a full awareness of exactly what he delivers. If you are stumped by how to articulate your true value, you need to either get up to speed or exit the retirement plan industry. As a retirement plan adviser, you are likely responsible for successfully influencing the savings habits and outcomes of hundreds, or even thousands, of plan participants.

What is it that you deliver? Is it a series of funds from which the plan sponsor may choose, or is it much more? If you are striving to deliver a specific percentage of plan participants to an 80% income replacement ratio upon their reaching age 65, then you must charge more than your neighbor who is simply providing a list of funds for the plan sponsor. There is no system available today that permits those two models to profitably compete at the same fee.

Know Your Margin

Unless you are a not-for-profit, it is your duty to know how much you must earn in order to remain a successful adviser within the retirement plan industry. You are of limited value to your client base if you cannot be there for them throughout their marathon run to save—from the start of their career up until retirement age. After expenses—for technology, staff, benefits and travel—what do you and your family need to live? Is it $200,000? More? Less? Retirement plan advisers need to know this number much better than wealth management advisers, because you are working with much slimmer margins and must always be in the position to pass a “reasonableness test” with and for whoever may challenge you on pricing. When computing your firm’s required margin, technology and internal efficiencies become your best friend.

Beware of the trap that has ensnared many advisers, who tell themselves, “Now that I have a good base of clients covering my fixed costs, the next client will cost me next to nothing.” Servicing clients rarely costs nothing. However, if you choose to match the pricing of your struggling competitor, your margin can be dramatically reduced. If that becomes the case, how will you get back to the margin you require? Will you make it up in volume, which was the mantra of the “not-for-profit,” overzealous Internet startups in the 1990s? Will you choose to overcharge the next client that comes through the door, in an effort to get back to where you need be?

Remaining a Spectator

It’s not easy to sit on the sidelines and watch others win the business with a low-fee model. Once the business has been awarded to a competitor firm that has low-balled its costs, you have a little bit of work left to perform. In such situations, it is prudent for the astute retirement plan adviser to speak with two of the interested parties—the plan sponsor and the competitor.

Wish the plan sponsor the best, and explain that you will always be there to provide advice if the winning firm is unable to deliver the services that you had proposed—leaving a favorable impression in the face of adversity is never a bad tactic. With your competitor, ask how it has become so successful at running such an efficient shop. Sure, the tactic might be tongue-in-cheek, but you may also learn a new way to look at how you deliver services.

Some races you do not need to win.