DC Recordkeeping: The High Cost of Low Fees

Recordkeepers are calling their services more efficient, or streamlined, but that may be a kind way of saying “less service.”

Ted Schmelzle

Kent Peterson

Sponsors of defined contribution (DC) retirement plans have been on a multi-year mission to reduce costs, both in fees for investment management and plan administration. And with apparent success: For recordkeeping in particular, surveys report that pressure from sponsors and advisers, as well as competition in the market, have reduced per-participant costs by about half, in dollar terms, over the last dozen years.

But sponsors and their advisers need to look beyond the published fee rates, as recordkeepers take measures to subsidize lower recordkeeping fees through investment products and other indirect routes. They also need to be alert to reduced levels of service, as recordkeepers automate and offshore their operations.

PLANSPONSOR met with Ted Schmelzle, Senior Director of Plan Sponsor Services, and Kent Peterson, Chief Financial Officer, both of Securian Financial Retirement Solutions, to discuss the evolution of the recordkeeping marketplace, the complexities facing sponsors, and the crucial role advisers play in optimizing costs and fees for their DC sponsor clients.

PLANSPONSOR: For years there have been moves to cut costs from all variables in the DC equation. Has the total effective cost really gone down that much, and what has been the benefit to sponsors and participants?

Kent Peterson: It’s hard to find a place where there isn’t fee compression in the retirement space—with asset managers, recordkeepers, and the advisers that support plans. Sponsors have been looking to pay lower fees, and providers have promised that they would deliver the same service at a lower price point. In many instances that helped to wring a lot of inefficiencies from recordkeeping.

But that may have run its course. In the conversations we have with sponsors and advisers, of course they think it’s great to have lower fees, but there’s also significant frustration with deterioration in service. That means sponsors and advisers have to work harder to make up for the reduced service, and in the end it’s just shifting the costs, rather than creating a true net saving. We’ve just published a white paper, Fee compression isn’t free, that discusses the challenges, and suggests a list of questions for advisers and sponsors to aid in their due diligence:

Ted Schmelzle: Many advisers that really provide sponsors with good input to their decisions are saying to clients “If all this is making your job as a sponsor harder, and more difficult for me too, then maybe the lower fees aren’t all they’re cracked up to be,” and pushing back on some of the fee compression.
PS: The structure of DC plan services is awfully complex—how does an adviser get a reasonably accurate view of the true cost sponsors are paying, and what it is they are paying for?

Peterson: There’s always an inclination to take the fee illustration the recordkeeper presents as the actual price. Advisers need to go well beyond that, and look for possible conflicts of interest for the service provider—revenues from other sources that subsidize the reduced recordkeeping fees. Unfortunately, the subsidies can take many forms—the provider can be guiding sponsors to use their own stable value funds, or adopt their in-house target date fund series, which may not be the best values. Revenue sharing through 12(b)-1 fees is still prevalent, too. More recently, a few recordkeepers have established so-called pay-to-play platforms, where they charge a fee to mutual fund companies to be part of a select list of investment options they offer to sponsors. And the smaller the plan, the more likely it is that sponsors are being talked into a recordkeeping arrangement that the provider presents as low cost, but in fact only appears to be, because they are hiding the true cost in some other element.

Beyond that, some providers aggressively mine data on participants leaving a company, to drive them to their IRA products. That’s a captive audience that can be easy to persuade. If a provider’s recordkeeping is relying on fees from IRA rollovers, then it’s not self-sustaining, and that has implications both for the plan participants and the people that buy the IRAs. If the recordkeeping services are priced too low, that means recordkeeping expenses are being embedded in the cost of the IRAs. Advisers should look out for those arrangements, and get representations from the provider that they won’t use participant data without the sponsor’s permission.

Schmelzle: All this represents a service opportunity for advisers, to identify the total cost picture. Those that are dedicated to the retirement markets, and take a fiduciary responsibility, recognize that recordkeeping is not a commodity, and see the conflicts of interest and distortion of the fees. We’re finding our greatest success with those advisers who are on guard and understand that responsibility, and see that those solutions are not aligned with their interests, or the interests of their clients. And in general, advisers who are more sophisticated and take a 3(38) or 3(21) fiduciary stance are gaining share in the market.
Advisers can also help clients navigate the disclosures providers are making. We all know how lengthy and complicated the disclosures are, and many sponsors just aren’t in a position to understand them, or digest or apply them.

PS: You mentioned that sponsors and advisers have been forced to make up for reduced service levels. How does that come about?

: Recordkeepers are calling their services more efficient, or streamlined, but that may be a kind way of saying “less service.” For the sponsors, the recordkeeper may not have dedicated account or relationship managers they can call and talk to. Another point is the intake of participant data, and the effort to ensure it’s suitable—does the recordkeeper just load it in their system as is, or do they work with the sponsor to ensure it’s as good as can be? That point might seem like it’s in the weeds, but everything depends on clean data.

For the participants, straight-through processing may be efficient, but does it take out all the human interaction, and lose some of the important protections on the security side? Does the recordkeeper have customer service representatives that have sufficient experience and acumen, and are dedicated to retirement plans? Let’s face it—we’re in a business where the details matter.

All this can mean extra work for the sponsor’s staff, which eats up the savings in the recordkeeping fees. And advisers have to recognize that streamlined services can create more work for them, too. Advisers have told me that “If I go with Brand X recordkeeper, I have to charge nine basis points more to cover picking up the slack from the lower quality of service.”

Securian Financial has been offering consultative retirement plan solutions to help employees achieve retirement readiness since 1930. Our innovative, fiduciary-friendly approach includes lowest cost share classes, extensive administrative outsourcing and exceptional service provided by long-tenured retirement plan specialists. Bundled and unbundled service platforms are available to clients of all sizes.

These materials are for informational and educational purposes only and are not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. Securian Financial Group, and its affiliates, have a financial interest in the sale of its products.
Securian Financial’s qualified retirement plan products are offered through a group variable annuity contract issued by Minnesota Life Insurance Company.

Securian Financial is the marketing name for Securian Financial Group, Inc., and its affiliates. Minnesota Life Insurance Company is an affiliate of Securian Financial Group, Inc.

DOFU: 9-2019