2007
DC Survey – Picking from the Tree of Providers

Advisers say that each provider has varying strengths, so “which one’s best?″ can be a thorny question

“Which provider should we choose?" How many times will an adviser be asked that over his career lifetime by a plan sponsor? Besides helping to monitor and select investment options for the plan, picking a recordkeeper is perhaps the most critical role asked of plan advisers.

 Although there has been a significant amount of consolidation in the industry over the last few years, there are still dozens of providers from which each plan can choose. Especially in the small-plan segment, there are numerous providers that could reasonably service a plan. As one respondent said to a PLANADVISER survey of financial advisers about their experiences with defined contribution (DC) providers: “In each market segment, different providers tend to stand out. No one provider is best at anything across all market segments."

That is why an adviser is so valuable to a plan sponsor—an adviser may see more RFPs in a year than a client might see in his career lifetime. Moreover, by working with a variety of plans, an adviser is better able to evaluate who is better at providing the type and level of service a specific plan requires. “Services are very similar so [it is] just execution I am commenting on," admits one adviser respondent.

Adviser Values

Advisers are expected to represent their plan sponsor client interests at all times, and certainly when it comes to picking and monitoring a DC service provider. Based on the importance levels advisers put on the criteria in selecting a provider for their clients, advisers are doing just that—putting service levels to themselves low on the totem pole.

When asked to rate the importance of seven items in selecting or evaluating a DC provider, advisers ranked service to plan sponsors and service to participants as the most important criteria (happily, since those also top the list of plan sponsor criteria in those evaluations—though in the reverse order). This was a change from last year, where range/quality of investment options was ranked second; this year that was third, instead of service to plan participants, followed by fee structure for plan sponsors. For the second year in a row, adviser fee structure, adviser support post-sale, and adviser sales/marketing support were cited as significantly less important than factors affecting plan sponsor and participant servicing. One reason: “Most real advisers are interested in finding the best fit for the client. Obviously, I like the providers better if they help me obtain the clients, but that happens infrequently," commented an adviser.

Provider Selection

Like last year, advisers generally concur that those providers that offer the best service to plan sponsors are the same as those with the best participant service levels. However, there is slightly less cohesiveness of advisers’ feelings about the general service levels offered to them by DC providers. In our three adviser-focused categories: best adviser support post-sale; best adviser sales/marketing support; and best fee structure for advisers, survey respondents agreed on six of the top providers.

Asked their reasons for selecting firms as best in class, main reasons included: the fee structure of the provider, the firm’s service offerings, even the locality of the firm. A handful of advisers also commented that they enjoy working with providers that share similar values, commenting on firms’ service models and on the focus on the participant experience.

Advisers noted the need for increased transparency in the marketplace: “I believe the open-architecture investment platforms will transform the 401(k) business and that revenue-neutral concession treatment will be become the new norm." In the recent fee-conscious environment, advisers are being proactive about supporting those providers who allow for variation in pricing and adequate disclosures. “Many providers now have a great deal of flexibility for pricing," comments one respondent. However, says another, “Adviser fees are driven by the advisers’ input and most all major players can accommodate this input." Of course, not all advisers agree on who has the best fee offering—as seen in varied comments.

Challenges

However, excellence in one area isn’t always enough, and advisers share the good and the bad. Of one provider, an adviser noted the firm offers “an adviser-delivered product with strong focus on service and support from participant to adviser. Fee and compensation structures are limited but fair and competitive; however, I would like to see more flexibility in both."

So what can be improved? Well, not everyone is thrilled with the services provided. “I did not make selections...because all providers put us at the bottom of the food chain," wrote one adviser. “They all need to improve how they help the folks who get them business." Further, some notes about restructuring at firms and issues resulting from consolidation did appear.

There rarely is a “single best" provider that will be best at fulfilling the needs and expectations of each and every client you service. Most providers offer what appear, on the outside anyway, to be very similar services, but understanding the nuances of differentiation is critical. Frequently, one must consider how a service is delivered (and for how much) as much as the “what" that typically suffices for purposes of the RFP. In addition to the services delivered to the plan, it is important that they deliver the support and services that you need to fulfill your service obligations to the plan. Regardless of an adviser’s particular process, the best advisers learn to make supportive relationships with a core group of providers that can allow you to do your job better.

Methodology

In October 2007, approximately 8,000 advisers that service DC plan clients were sent a link to an online questionnaire developed by PLANADVISER editorial and research staff. The list of advisers was derived entirely from PLANADVISER’s own proprietary database. The questionnaire asked for the size and scope of the adviser’s qualified plan business and assessments of defined contribution providers; 164 total usable responses were received from qualified plan advisers

Adviser firm affiliation

• Independent advisory firm: 43.60%
• Wirehouse or regional broker (full-time employee of such a firm): 22.70%
• CPA/accounting firm: 1.70%
• Registered investment adviser (RIA): 22.69%
• Other: 9.31% 

Retirement plans currently under advisement

• 401(k): 98.90%
• 403(b): 54.50%
• 457: 29.20%
• Nonqualified: 44.90%
• Defined benefit: 51.70% 

Qualified plan clients

• fewer than 15:19.30%
• 16-30: 23.80%
• 31-50: 12.70%
• more than 50: 44.20% 

Importance in selecting or evaluating DC providers (1-7 scale)

• Service to plan sponsors: 6.74
• Service to participants: 6.61
• Range/quality of investment options: 6.48
• Fee structure for plan sponsors: 6.37
• Fee structure for advisers: 5.52
• Adviser support post-sale: 5.39
• Adviser sales/marketing support:4.49 

Do you work with a TPA firm?

• Yes: 76.40%
• No: 23.60% 

Compensation for qualified plan business

• Asset-based fees: 81.30%
• Commissions: 63.70%
• Per participant: 5.50%
• Per project 24.70%
• Other (most frequently flat fee for service): 19.80% 

Support services/tools currently relied on from plan providers

• Marketing collateral: 58.60%
• Research: 55.90%
• Conferences: 52.60%
• Practice management support 36.80%
• Sponsorship of certifications/designations: 23.00%
• Other 13.20%

Best range/quality of investment options*

• CPI Qualified Plan Consultants
• Charles Schwab
• Great-West Retirement Services
• John Hancock
• ING
• Merrill Lynch
• MFS
• Nationwide Financial
• Nationwide Retirement Solutions
• Newport Group
• The Standard

Best fee structure for plan sponsors*

• American Funds
• BISYS Retirement Services, Inc.
• Charles Schwab
• CPI Qualified Plan Consultants
• Fidelity Investments
• Great-West Retirement Services
• ING
• Merrill Lynch
• Nationwide Financial
• Newport Group
• Principal Financial Group
• Prudential Financial
• Vanguard Group

Best adviser support post-sale*

• American Funds
• Fidelity Investments
• John Hancock
• The Hartford
• ING
• MassMutual Financial Group
• Mercer/Putnam
• Nationwide Financial
• Principal Financial Group
• Prudential Financial
• The Standard

Best fee structure for advisers*

• American Funds
• CPI Qualified Plan Consultants
• Fidelity Investments
• Great-West Retirement Services
• John Hancock
• ING
• MassMutual Financial Group
• MFS
• Merrill Lynch
• Nationwide Financial
• Prudential Financial

Firms most commonly worked with*

• American Funds
• BISYS Retirement Services
• Fidelity Investments
• Great-West Retirement Services
• John Hancock
• ING
• MassMutual Financial Group
• MFS
• Nationwide Financial
• Principal Financial Group

Best adviser sales/marketing support*

• American Funds
• Fidelity Investments
• John Hancock
• ING
• MassMutual Financial Group
• Nationwide Financial
• Principal Financial Group
• Prudential Financial
• The Standard
• Transamerica Retirement Services

Best service to plan sponsors*

• American Funds
• Fidelity Investments
• Great-West Retirement Services
• John Hancock
• The Hartford
• Mercer/Putnam
• Merrill Lynch
• Nationwide Financial
• Principal Financial Group
• Prudential Financial
• The Standard

Best service to participants*

• American Funds
• Diversified Investment Advisors
• Fidelity Investments
• John Hancock
• The Hartford
• Merrill Lynch
• Nationwide Financial
• Principal Financial Group
• Prudential Financial
• The Standard

* listed alphabetically