Recordkeeper “House” Investment Options Worth a Look, But Carefully, Advisers Say

Proprietary recordkeeper fund options can be worth the fee reduction in investment plans, but they must be looked at carefully, note advisers in a PLANADVISER practice progress webinar.

Retirement plan advisers are hearing more from recordkeepers about proprietary stable value and fixed income fund investment menu options for plan sponsors, according to advisers speaking Thursday on a PLANADVISER practice progress webinar covering defined contribution only investing.

These offerings can be worth consideration, particularly as they generally come with a reduction in recordkeeping fees, but they need close evaluation of performance to ensure it’s the best option for participants, according to Steven Kaczynski, senior financial adviser, managing director, fiduciary plan solutions, DBR & Co.

Recordkeepers are presenting what are generally collective investment trust funds that include fixed income or stable value accounts that are proprietary, or have a proprietary glide path, Kaczynski said.

“I think there are potential serious pros, or benefits to that innovation,” Kaczynski said. “What the plan sponsor sees most noticeably is a chance to reduce recordkeeper fees further. That’s usually the tradeoff for selecting, especially a QDIA [qualified default investment alternative], that includes stable value or fixed income offered by one of the prominent fund companies or insurance companies. At the same time, there are concerns on the part of advisers and fiduciaries because these are proprietary to the recordkeeper they’ve selected.”

Some plan sponsors and advisers are not interested in taking these types of investment options on  due to the potential conflict of interest, Kaczynski said. But as an independent registered investment adviser, he says DBR will evaluate all the pros and cons of a proprietary vehicle versus the more common third-party fund provider, both from the fiduciary and investment performance aspects.

“That’s the legwork and the analysis that needs to be done,” he said.

Another factor, he added, is that some of these products are new and don’t “have a lot of performance history to evaluate.”

Focusing on the Merits

James Sampson, national practice leader, Hilb Group Retirement Services, noted that when working in the medium-to-smaller size plan sponsor market, recordkeepers don’t have as many options available, particularly with stable value funds, though that is starting to change.

“That is opening up a little bit,” he said. “But one of the challenges we often run into is the fact that we have to vet whether the fund is good enough on its own merits to be able to use. And if it’s not, that makes it a very difficult conversation with that recordkeeper.”

Sampson said it comes down to the fund being able to stand along on its own merits. If it can do that, along with providing a discount on the recordkeeping fees, it can be a “win-win.”

“We do have to try to balance [investment performance] in terms of looking at it from a fiduciary lens,” he said. “We have to identify the conflict of interest, but then we have to identify whether or not it’s detrimental to the plan, or could it possibly be an advantage to the plan?”

Sampson noted that the industry has come full circle, from plans only offering the proprietary investment products years ago, to moving fully away from them to meet fiduciary standards.

“These recordkeepers still have to make money, they have to be profitable to be able to offer a quality service,” he said. “A lot of times what they are forced to do now. … is find ways to generate additional revenue. ‘Is it through our fixed product? Is it through our managed accounts program? Is it through some other avenue?’ Oftentimes to get that to work they need to give the plan some kind of an incentive, and usually that comes in the shape of a discount in recordkeeping services.”

Kaczynski noted that another selling point that recordkeepers can offer is access to multiple fund companies through their offerings, as opposed to just one fund company per offering from third parties.

Getting Personal

As the industry continues to focus on further personalizing participant investments, the advisers are also getting a lot of pitches for managed accounts offerings. Sampson said that his firm uses target-date funds almost universally as the default option, with only a couple of plans that default to managed accounts. He likes to keep managed accounts as optional because many participants don’t understand, or want to dig into, the value that a managed account can bring if used correctly.

“They look at a managed account program as simply, ‘somebody is picking my funds for me, and I’m paying a fee for it,’” he said. “As we all know that’s not exactly how it works. …. Most of the managed accounts programs that are out there go much deeper than that. They offer advice on deferral rates, how much you should be saving, should you be doing pre-tax or Roth? They start to get into managing the overall participant need as opposed to just picking the funds.”

Samposon is interested in some of the new recordkeeper offerings that put participants in a target-date fund to start, and then flips them to a managed account when they are in a better position to use the service.

“I personally think those have an awful lot of merit. …. I think we just have to get over that fee stigma,” Sampson said.

Kaczynski noted that a default option should be simple, low-cost, and transparent, and that one could argue that participants have advisers available to them without going through a managed account.

“Is this just something more that plan sponsors, once again, have to really, competently evaluate, especially if it’s going to be a default,” he said. “I think these are considerations that need to be understood on the part of the fiduciaries involved.”