Retirement Advisers See Increased Scrutiny on Fees, Services

Retirement plan advisers may be seeing an increase in request-for-proposal evaluations, presenting both an opportunity and a risk for their businesses, according to industry participants.

The number of RFPs being asked of retirement plan advisers has grown tremendously in the last 18 months, says Jay Gepfert, president of the Culpepper Group LLC, which assists plan sponsors in evaluating advisers, recordkeepers and cybersecurity services.

“Plan sponsors and ERISA counsel are realizing that the market is tightening and that there may be a better deal out there for advisory services,” Gepfert says. “There needs to be some form of analysis every three to four years. … It doesn’t have to be a full RFP, but not doing anything over four years is a little dated.”

One key driver for plan sponsors in re-considering their adviser team is the wave of consolidation by aggregators, according to industry participants.

“Consolidation, mergers, and acquisitions in the institutional investment advisory space have also contributed to the increase in search activity,” says Gregory Metzger, practice leader for North Pier Search Consulting. “Plan sponsors should not accept the standard line of ‘nothing will change except the logo and access to more resources.’”

Metzger says that plan sponsors recognize that there is “too much is at stake” after an announcement of a merger or consolidation, and are requesting additional due diligence on their advisers.

Another driver for plan sponsors to shop around is to ensure competitive fees within their defined contribution investment offerings. Gepfert of Culpepper, who does about 15 evaluations per year for plans of $100 million to multiple billions, says most of his clients are moving toward flat fee charges from advisers, as opposed to fees being determined as a percentage of assets. This is in part due to plan sponsors realizing they are paying more as they add assets without receiving added services, he says. 

“The reality is the amount of work the plan has to do at $50 million is about the same as the work that needs to be done at $100 million,” Gepfert says. “It’s the same services, so people are moving away from an asset-based fee.” 

Beyond Fees

Adviser and investing fees are not the only areas plan sponsors want to check. A survey by recordkeeper Fidelity Investments from 2022 indicated that 75% of plan sponsors are satisfied with their adviser. However, that same survey showed that 48% of sponsors are also considering a new adviser—an increase from 34% in 2021 and 17% in 2020.

That increase in new adviser consideration indicates “how competitive the landscape is for ERISA adviser services,” says Eric Dyson, the executive director of RFP 401k Advisor, who works with plan sponsors on identifying both advisers and recordkeepers. “Even plan sponsors who are satisfied are looking to potentially improve on what they have.”

When Dyson works with plan sponsors, he says there is less of a focus on fees—though they are important—than on finding the right cultural fit between the adviser and plan committee.

“I like to sit down with a plan right before the adviser search and ask, ‘What are you looking for? What do your committee meetings look like?’” he says. “Do they want an adviser that is going to tell them everything they need to do, or one that is more collaborative?”

One example, Dyson says, is a retirement plan committee that needs fiduciary training from the adviser, compared with one that is able to meet that need through another source.

Litigation Risk

Increased fiduciary risk and litigation facing institutional plans is another key reason plan sponsors may be shopping more frequently, says Daniel Aronowitz, managing principal and owner of Euclid Specialty Managers, which provides underwriting for fiduciary liability, cybercrime and insurance for employee benefit plans.

Among the reasons his firm recommends occasional adviser RFPs is so plan fiduciaries are prepared for a potential Department of Labor audit, which will test whether the plan fiduciaries are always acting in the best interest of participants.

“We believe it is always valuable to occasionally test the market to ensure that any professional fees paid by a plan and services offered by the plan are market competitive,” Aronowitz says. “The RFP can help plan sponsors to evaluate if existing plan features and services are up-to-date. It also provides valuable insight and market intelligence to confirm if the plan’s investment options, fees and services are competitive in a rapidly changing market.”

The competitive market does not necessarily mean that everyone is going out for RFPs.

Tim Rouse, executive director of the SPARK Institute, has been hearing a tale of two cities from retirement plan sponsors. On the one hand, RFP volumes are up for micro-plans as they serve to meet retirement plan needs. But larger-plan bidding appears to be flat or down as plan sponsors await clarity on changes resulting from the SECURE 2.0 Act of 2022 and manage the current economic environment.

Rouse is hearing that “many HR departments are spending a lot of time looking at their labor force and don’t have as much time to consider going out to bid.”

Overall, Gepfert says the move toward tighter margins across the retirement industry started in 2012 with the Department of Labor’s rule that fees and services have to be “reasonable” when it comes to retirement savings plans. That guidance, he believes, had a “transformative” effect on the industry that has led to tighter margins for recordkeepers, investment managers, actuaries and, now, advisers. Whether this shift is a good or bad thing for the industry remains to be seen, he says.

“It’s taking place,” Gepfert says, “and if you’re a plan sponsor you should be aware of it.”