Tidal Pulls
Although it is not yet finalized, the 408(b)(2) swells are building in Washington, and the resulting waves appear ominous and steadily moving toward America’s retirement plan coastline. When the final legislation does come out of Congress, the resulting ripples—or new waves—that are sure to occur will have a broad impact on America’s dominant retirement savings plan: the 401(k).
The ripples will manifest themselves as these ideas: financial services companies have not been disclosing fees; financial advisers are paid too much; plan sponsors have been derelict in their duty to monitor fees; and, therefore, the American worker must work longer.
Financial advisers who service the needs of either plan participants or plan sponsors in the retirement plan business are well aware that, once the inevitable fee disclosure becomes either regulation or law, the above points are destined to become tomorrow’s provocative headlines.
As with any force, there is a counterforce. The current emphasis that Congress is placing on the fees within the 401(k) and retirement plan industry is sure to have an effect that reaches service providers and financial advisers. Are advisers who service retirement plans ready for what is about to occur?
These are questions financial advisers should be considering right now, so that they are prepared for the new full fee disclosure environment.
What Are They (Congress, the Regulators, the Press) Missing?
A lot. Have you ever agreed to meet with the plan sponsor’s production staff on the shop floor of the plant, with hard hat and safety goggles, to explain dollar-cost-averaging in a freezing break room while talking over the background TV to a second-shift metal-stamping unit—all the while knowing that you will be missing your daughter’s 12th birthday? That is not a line-item expense.
Have you ever sat one-on-one with a participant to go over his personal financial situation, dancing the fine line between education and the forbidden zone of investment advice? Then, you realize that the participant across the table from you is deferring $25 per week into a 401(k) because that is all he can afford due to an outstanding credit card balance of more than $7,000—which carries 22.5% interest—and you subsequently “educate’ him to suspend the 401(k) deferrals and pay off the credit card first. That is not a line-item charge.
Any of you who have sold or serviced 401(k) plans over the years know that the above descriptions, as unpleasant as they sound, are real-life scenarios. You know that they are very important to the overall success of plan participants. You also know that if, as a financial adviser, you were required to price these events into the plan when initially bidding for the business, you could not do it. There is no way for you to anticipate and document in advance accurately every “what-if” scenario into a line-item charge.
Where Does That Leave You?
At some point, there will be a day of reckoning of fees and services. Full disclosure or not, everyone in the retirement plan industry understands the need for every servicing unit along the value chain to make a profit. When fees are constrained, something must give. At the financial adviser level, you will likely be forced to reduce services in order to maintain margin.
Historically, price has been a function of service and value delivered. We are entering into an environment where price will have other outside influences. It is your job to make sure that your organizational efficiencies and process improvements will insure that plan participants and plan sponsors continually receive the best value for their money, and do not suffer the unintended consequences of full fee disclosure.
Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice serving corporations and nonprofits. A judge for thePLANSPONSORRetirement Plan Adviser of the Year award, and a faculty member of the PLANSPONSOR Institute, he is also the co-author of How to Build a Successful 401(k) and Retirement Plan Advisory Business.