Needs Analysis, Fee Benchmarking Are Keys to Growing and Protecting Your 401(k) Business
The Department of Labor’s fee disclosure rules haven’t necessarily had the tumultuous effect that many in the industry expected them to have; however, one consequence of the regulations for financial professionals has been increased opportunity and competition as sponsors begin re-evaluating their plans’ value in light of their cost.
This focus by plan sponsors is forcing financial professionals to take action to protect their current book of 401(k) business, while at the same time offering exceptional opportunities to grow their business where other financial professionals may not be as vigilant.
One of the very best methods to protect and grow your business is to incorporate a “needs analysis” and a “value and cost” benchmarking procedure into your practice. The 408(b)(2) fee disclosure rule requires that plan fiduciaries “evaluate the necessity and reasonableness of the fees charged for the services provided.” Most financial professionals and sponsors have focused on the “reasonable” part of that equation and have looked at whether plan services are priced “right,” which is very important. However, many financial professionals (and plan sponsors for that matter) have ignored the other key word: “necessity.”
A needs analysis is a great way to determine whether or not the plan sponsor actually needs or requires the services that will eventually be benchmarked and assessed for reasonableness. By understanding plan needs and objectives, a financial professional can help establish the context for an effective and eventual conversation around plan fees. If a plan sponsor understands the need for a service or service provider, he or she will naturally be in a better position to then determine the reasonableness of the fee being charged and to understand why and what they are paying for.
Financial professionals should consider performing a needs analysis with all current plans on a regular basis to ensure the services match the objectives of the plan and are filling a specific need or gap. This is particularly important in the small plan market where internal resources are thin and more administrative and other services will be required to be outsourced. Also, financial professionals should consider using a needs analysis as a tool to target new plans and as a way to demonstrate knowledge and value to potential new clients.
Once a needs analysis has been completed, the financial professional can then help align plan needs with service provider support. Plan providers offer various tools and procedures to accomplish this objective, so financial professionals don’t have to reinvent the wheel. For example, at Guardian Retirement Solutions™ we use a tool called The Resource Optimizer™, which we developed in conjunction with Jason Roberts of the Pension Resource Institute, that enables clients to determine plan risks, employer needs and the opportunity costs of implementing a retirement plan.
A needs assessment also helps evaluate and document a plan sponsor’s approach to regulatory compliance and participant engagement. By keeping a needs analysis in a plan sponsor’s fiduciary file, the plan sponsor is demonstrating a commitment to plan governance and also maintains valuable documentation. Regardless of the size of the plan, certain DOL fiduciary requirements must be adhered to. Large or small, plan fiduciaries are all held to the same fiduciary standards because the provisions of ERISA apply to all plan sponsors regardless of size. Therefore, many small business owners rely on third-party, expert service providers like financial professionals, record keepers, TPAs and fiduciary support services providers to:
- Help maintain the tax benefits of the plan
- Provide education to the sponsor and participants
- Assist with compliance and regulatory issues
- Enhance administrative and cost efficiency
- Provide plan sponsor and participant support
Once a needs analysis has been completed and service provider support has been aligned with those needs, only then can the plan sponsor and financial professional have a truly effective conversation around what costs are considered reasonable. It’s important to help clients understand the value for the fees they pay. Determining “reasonableness” is a not only a question of costs , so benchmarking for current and potential clients every couple of years should be a best practice for financial professionals. In this way, financial professionals are able to open and maintain important lines of communication and demonstrate their expertise and value. However, costs, without understanding the value of the services being provided or the need for the service is a meaningless metric. The DOL rules do not state that you need to be the cheapest option available, just that your fees need to be “necessary and reasonable."
Stephen Davis is the National Sales Manager at Guardian Retirement Solutions™.
Guardian Retirement Solutions™ refers to the administrative support services, including participant recordkeeping as well as marketing, enrollment and educational materials, provided by GIAC in conjunction with the individual and group retirement products issued by GIAC.
This article is not intended by The Guardian Life Insurance Company of America, The Guardian Insurance & Annuity Company, Inc. (GIAC) or any of its employees or agents to be considered as investment, tax or legal advice.
