“Ripe for disruption” is a phrase that gets tossed around a lot in the business development context, so Josh Robbins, lead strategy officer for America’s Best 401K, likes to take some time to contextualize and define it.
In the defined contribution (DC) plan advisory industry, he says the potential for major disruption is neither debatable nor hard to define, and “this is simply because until now the brokerage industry has had a free pass when it comes to setting their own compensation, particularly when it comes to the small end of the 401(k) plan market.”
“We know that as an average, recordkeeping and investing fees for 401(k) plans have been coming down for some time—even to the point where you can make the claim, as researchers are doing, that 40% of plan sponsors drove down their fees in just the last year,” Robbins says. “But when we dig deeper, we have to make the caveat that this is only referring to very well-established plans with more than $100 million in assets. This is actually just a fraction of one percent of all the plans that exist out there.”
Yes, Robbins agrees, these very large plans by their nature cover a large proportion of all 401(k) savers.
“But that doesn’t mean we can ignore the millions and millions of investors in smaller end of the market,” he warns. “So that’s the heart of our model of disruption for 2018 and beyond, and why we say the DC advisory industry is ripe for disruption. The longstanding trend of falling fees has actually been non-existent in the small plan population, say those with 100 employees or less. There is a massive amount of compensation being paid out in this market, and we believe there are many unnecessary middle men.”
Whether one agrees with that assessment, readers won’t be surprised to hear Robbins lament the lack of greater visibility into the small plan market, based on the fact that small plans can still file the short-form Form 5500. On Robbins’ assessment, the easy version 5500 is “not informative at all for data collection purposes or for really getting a grip on this marketplace.”
“The lack of fee visibility, in this respect, remains an enduring challenge in the small-plan market,” he observes. “While the Department of Labor (DOL) fiduciary rule, delayed as it is, has had a dramatic impact on fees and best practices in the larger end of the market, in this small plan space, there is a real lag on best practices. When we go in and try to drum up new business, we see it so clearly. Usually the owners of these small companies are actually quite surprised to learn that their current broker is not necessarily acting as a fiduciary.”
It’s only natural that a lead strategy officer would talk this way about his firm’s approach to new sales, but it is noteworthy to hear how frank Robbins is in speaking about the way clients and failed prospects alike react to the America’s Best pitch.
“When we can come in and we model our low fee against what the broker is charging, and then we demonstrate how the costs and savings compound over time, so many will immediately jump on board,” Robbins suggests. “In many cases we can show them, based on current contributions and plan balances, exactly how much we can save them over 10, or 15 or 20 years. Take a $1 million plan with $100,000 in projected annual contributions. We can show them very clearly how coming down to our fee will result in there being an extra $1 million dollars in the plan over 20 years. That’s the disruption.”
The result of this pitch has been a remarkably efficient sales cycle, Robbins says, with the average closing time on news clients standing at 34 days.
“To be clear, there are two different sets of advisers out there, one of which we are competing against and once of which we aren’t, necessarily,” Robbins says. “We don’t really want to go up directly against the folks who are out there using low cost funds, open architecture platforms, and providing a streamlined low-cost core lineup—who are independent registered investment advisers in their own right willing to be a named fiduciary. Instead, we are targeting the brokers who come in and want to peddle, say, a small regional insurance company’s pricey recordkeeping platform and its proprietary lineup of active funds.”
Robbins points to “the large payroll companies” as well: “We feel they are keen on finding ways to extract significant fees for less value. And we can talk about the occurrence of churning of recordkeepers and the commissions RIAs or brokers are collecting on that work. Those are the individuals and firms we are after, no doubt. It’s not the individual RIAs who are embracing best practices and who are true fiduciaries in their own right.”
Robbins concludes with a telling anecdote.
“We frequently get contacted by these brokers asking if there are ways we can work together with them on plans we are winning from them—and the answer has to be no, because we are doing the 3(38) work and we just don’t feel we need that additional layer. We are a direct-to-sponsor model and we will remain that way,” he concludes. “We wouldn’t take on plans that have tens of thousands of employees—we do have a natural ceiling in our model, in that sense. Of course we’re not going to turn away a large plan that likes our model, by any means, and we are more than ready to handle the scale of that.”