PLANADVISER: What does the Department of Labor (DOL) fiduciary rule mean for benchmarking?
Tom Kmak: Under ERISA [Employee Retirement Income Security Act], there’s always been the requirement that plan sponsors need to determine fee reasonableness. But, because of the fiduciary rule, there’s a prohibited transaction if the service provider receives unreasonable compensation. If a provider is operating under a BIC [best interest contract], it has to ensure that the fees are reasonable under the best interest contract exemption [BICE] and prohibited transaction exemption [PTE] 84-24.
With an IRA [individual retirement account], the Department of Labor [DOL] put the onus on the service provider for fee reasonableness, since there is no plan fiduciary to help. The service providers must make sure their fees are reasonable because the onus is on them, not the participant, who frankly doesn’t know enough to make these determinations.
PA: For the last eight years, your firm has been tracking plans—what have you learned, and what has changed during that time?
Kmak: First, we’ve learned that folks in government know that, mathematically, lower fees don’t trump better savings behavior, better investing behavior or better spending behavior. So there’s an established legal high road that fees have to be reasonable, not necessarily low.
Secondly, we’ve discovered a simple mental model that works very well with plan sponsors. You’ve got fees on the left hand; what you should consider on the right hand is what we have an acronym for called QSVE. Q is the quality of the provider, S stands for the services it is delivering, V for the value it supplies, and then E is for extra credit it might be giving. We’ve seen some things that, frankly, you just can’t benchmark. We’ve seen plan sponsors ask for a large number of participant meetings, or require relatively rare but more testing because of the complexity of their plan. Those things fall into what we call “the E-component,” which is extra credit. That way, plan sponsors can grasp the concept that fees should reflect the quality, service, value and extra credit they receive.
Our product design incorporates that quality, service, value and extra credit model, which resonates very well with plan sponsors, and service providers. Considering more than just fees is better protection for the plan sponsor, improves outcome for participants and ensures service providers are treated fairly for all they do for both parties.
PA: What are best practices in benchmarking now, in this current environment?
Kmak: Advisers need to be proactive and assertive. If you can understand what your book of business looks like in terms of the market and what prices are being charged for services—and what should be charged—you can point out any problems to your client before somebody else does. That engenders trust.
Our biggest clients and plans generate a benchmarking report every year, and some others every three years, so the plan becomes part of the cycle. Make this part of how you work with your clients on an ongoing basis, just like you would analytics for investments or analysis of plan design.
PA: What’s next?
Kmak: We’ve launched our first IRA service related to the fiduciary rule; it’s a best interest determination tool on rollovers that, besides fees, presents 16 different factors to consider—things such as retirement planning issues, investment flexibility issues, how you want to take your money in retirement, annuities versus loans versus bankruptcy issues. This tool has been chosen by some of the largest institutions in the country that handle rollovers, which has been pretty exciting.
We knew there was a surge in pricing changes, fiduciary services changes and provider service changes, so we’re now starting to build our benchmarking practice for IRAs. We’ll take what we did for DC [defined contribution] plans and move it over to the IRA side.
The final thing we’ll do, related to IRA services, is provide an analysis of level fees versus commissions. We think it will be important for advisers to have a way to show a client, “Look, in terms of commission versus level fee analysis, here’s what’s actually better for you on an objective basis.”
All three of those services are consistent with our tagline—they all involve independent, informative and comprehensive analysis, which is what we specialize in. We’re the folks that, when you have a multi-billion-dollar plan and somebody’s trying to make a decision, we supply a document and a file that would stand up as a procedurally prudent process.
You’ll also see us start to move our DC business more aggressively into the 457 space, [even though those plans are not ERISA plans] because they are realizing the value of good fiduciary management practices.
We may consider expanding our benchmarking services to DB [defined benefit] plans, taking the existing methodology and moving it into other market spaces that, again, require independent, comprehensive, informative input.