At the ASPPA 401(k) Summit in Las Vegas this week, three panelists from different vantage points in the industry discussed how an adviser should frame their value for a plan sponsor. The speakers were Dorann Cafaro of Cafaro Greenleaf, a retirement plan advisory firm based in Little Silver, New Jersey; Steven Pulley of the Alliance Benefit Group based in Albert Lea, Minnesota; and Scott Senseney from Fidelity Investments.
First, the panelists said that the fact that the industry is currently focusing on value is part of a logical course of events. Regulators and plan sponsors first wanted transparency of fees. This then led to disclosure, which then required fees to become more “reasonable.” Now that fees should, for the most part, be reasonable, it’s now a matter of showing what value lies in these reasonable fees.
Cafaro said advisers’ value lies in the many services they can provide. Some of these services an adviser should highlight include: vendor management and plan search support (specifically the RFP process); preparation of investment policy statement; performance monitoring; fiduciary education services to a plan committee; number of committee meetings; participant education and communication (Cafaro said by providing these services, the provider would need to lower its fees); participant support; plan design; fee disclosures; monitoring retirement industry; fiduciary status (whether you are 3(16) full-scope, 3(21) limited scope, or 3(38) full-scope).
Pulley focused on the many tasks a third-party administrator (TPA) is given for a plan, and how the adviser should make sure it is fulfilling its duties (if the adviser is mindful of the TPA, that’s one less thing the sponsor has to worry about). Pulley outlined what an adviser should look for in a TPA. A TPA should be knowledgeable, he said. Check if it has ASPPA certifications, if it’s CEFEX certified, SAS 70 type II completion, and references can be used as well; talk to your peers to find out what they think of a certain TPA, he said.
An adviser also wants to pick a TPA that works in a timely fashion – do they return phone calls and emails within four hours? Do they complete the work to the client’s satisfaction? Also, be sure the TPA is easy to work with – are the people friendly? Do you like the management/ownership? Very importantly, are they accurate – they need to get it right, otherwise, there’s no value to add. Lastly, an adviser should consider the cost effective of a TPA – and cheapest isn’t always the best, Pulley noted. Too often, “the TPA world gets ‘spread-sheeted,’” he said, but there are a lot of things to consider. For instance, does the TPA have errors & omission insurance? The fundamental question to ask is, are you getting value for the fees? Pulley quoted a colleague who once said, “You can’t pay too little for bad services.” You can always find someone who’s cheaper, but the services might be worthless, he concluded.
Senseney from Fidelity discussed value of fees in terms of how defining “success” has evolved in the industry. Success used to be measured by adoption rates; does a company even offer a defined contribution (DC) plan? As DC plans grew in popularity, it became a question of if participants on track; are they enrolled, what’s the average deferral rate, and are they allocating correctly? While these topics are still considered, the industry has begun to look more at engagement and participant behaviors. Targeted approached are starting to replace “broad-based communications,” and “retirement readiness” is also a relatively new metric, he said. In the future, Senseney believes benchmarking financial success will add value to an adviser’s services; adding peer evaluation tools, looking at the total asset picture, and more dynamic analytics.
The Department of Labor (DoL) has said fees aren’t everything, Senseney pointed out. The regulations are clear on this; the regulations are not just demanding lower fees. Lower fees don’t affect retirement readiness, he said; it’s all about saving. The panelists touched on how recent media coverage saying 401(k) plan have outrageous fees are not helping, but it’s up to the industry to prove how wrong those allegations are.
Senseney concluded by saying benchmarking is good for any industry; did consumer reports hurt Sony when they first appeared? Or has Edmunds hurt BMW, or Morningstar hurt Fidelity? No, he said. This new era of fee disclosure will only make the industry stronger in the end.