Recordkeeper RFP Case Study Suggests New Strategies

J.P. Morgan researchers offer an advanced look at a case study analysis suggesting a new approach to conducting adviser-supported recordkeeping RFPs. 

Researchers with J.P. Morgan Asset Management recently sat down with PLANADVISER to offer an early view of an interesting new case study, “Reverse the Search.”

The release of the research coincides with the publication of PLANADVISER’s own 2017 Recordkeeping Services Guide, and taking the two together offers some important food for thought for plan sponsor clients entering the request-for-proposal process. Our analysis shows recordkeeping remains a challenging and highly competitive business, as exemplified by the shrinking number of providers participating in the annual PLANSPONSOR Recordkeeping Survey and accompanying PLANADVISER Recordkeeping Services Guide. Brian O’Keefe, director of research and surveys at Strategic Insight, parent of PLANADVISER, says, “Recordkeeping is often described as a commodity, and that might be true for the administration of participant accounts, but the 55 providers responding to this year’s survey showcase a wide range of investment, technology and servicing options.”

Besides helping people accumulate and manage savings, recordkeepers now need to work with Baby Boomer participants trying to plan how best to manage those savings. While plan sponsors are waiting on a safe harbor for lifetime income products from the Department of Labor (DOL), recordkeepers are already proving that they are willing to create the necessary capabilities to support them.

With so much ongoing evolution in the marketplace, Charlie Cote, head of Retirement Link Sales at J.P. Morgan Asset Management, says the time has come to rethink the “conventional approach” to recordkeeper searches, which separates the effort into two phases: “First, choose the recordkeeper. Then, choose a QDIA solution.” As laid out in the J.P. Morgan research, an alternative that may be better suited for today and tomorrow’s recordkeeping/investing market is to “reverse the order of the search.”

“By that we mean selecting the TDF provider first and the most appropriate recordkeeper second,” Cote says. “A different order doesn’t have to change the essential element of any retirement plan search. Defined contribution (DC) plan advisers who act as fiduciaries must follow a prudent process when helping plan sponsors. Their objective is to help clients choose a strong plan that meets their unique goals.”

NEXT: TDF dominance informs recordkeeper search 

It should be noted that this case study is coming from a large-volume provider of target-date fund (TDF)  products, but the analysis is carefully presented. As Cote explains, one of the firm’s DC advisers recently conducted a plan provider search for a client with $15 million in plan assets and 175 active participants. The adviser, reversing the traditional approach, asked four “well-known providers of bundled 401(k)s” to submit R6 pricing proposals for recordkeeping and administration only—assuming their proprietary funds would not be included.

Next the adviser conducted a search for a target-date fund manager suited to the plan sponsor’s objectives and participant demographics. She also advised the client to conduct a TDF re-enrollment, defaulting participants (unless they chose to opt out) into an age-appropriate TDF vintage for their presumed year of retirement.

“What we found in reviewing this scenario is that, if the TDF manager had been selected first, and the adviser had requested the same four recordkeepers provide R6 TDF re-enrollment pricing second, their proposals would have looked different,” Cote says. “Under the conventional approach the committee would chose Provider A for its competitive fees and respected brand. But when the search was reversed the evidence supports Provider C, who is also the TDF manager and can thus apply its investment fees to recordkeeping and administration.”

The implication is that Provider C’s total plan cost would have been $48,000 per year less than Provider A’s—so long as the plan sponsor uses Provider C’s target date fund. “Choosing to reverse the search has a significant impact over 10 years,” Cote adds. Any fiduciary concerns about self-dealing should be alleviated by the fact that the sponsor conducted the TDF search first and made that choice on its own merits. 

By the end of a 10-year window, the difference in pricing between the recordkeeper selected through the traditional and reversed process is striking: $1,662,477 for the traditional approach, compared with just $1,043,881 for the provider chosen through a process that weighs from the beginning the target-date fund offering.

There are other interesting themes coming out of the research. Notably, Cote says, if an adviser chooses a TDF and recordkeeper from the same provider, they may want to consider the conditions that would trigger a re-pricing of the plan. It will be important from a fiduciary prudence perspective to closely monitor these conditions over time and to take action to negotiate better pricing when appropriate.

“For instance, what happens if the adviser switches out the target-date fund because it underperforms the investment policy statement? Advisers should read the fine print in the services agreement and ensure their client is prepared for all contingencies,” Cote concludes.