Our industry is under pressure. That pressure is spread among all retirement plan professionals, including investment complexes, investment managers, broker/dealers, registered representatives and registered investment advisors. No entity appears to be spared.
Retirement plan advisors receive targeted pressure that is not likely to subside any time soon. Regulators, the judicial system and various media — broadcasters, authors and bloggers — consistently suggest systemic change to the retirement system. This pressure can inflict damage on the relationships that retirement plan advisors maintain with their clients.
Do We Need Change?
The answer to that question is “yes.” What should be changed, however, is not so simple.
The Department of Labor wants a new fiduciary rule for advisors and financial services firms, with greater accountability, broader powers to encompass IRAs and lower fees for plan-related services.
The courts want all plan sponsors to act like responsible fiduciaries. As evidenced in past settlements, every damaged participant should be restored some fractional proportion of what they are entitled to.
Bloggers, reporters and authors seem to want someone, or some entity, to be held accountable for the large number of U.S. citizens who do not have sufficient funds to maintain a dignified lifestyle at normal retirement age. The conclusions of these consumer advocates frequently cite fees as being the source of a looming retirement crisis.
These sources have become a collective voice, delivering an incessant barrage of body blows that wears down the reputation and resiliency of retirement plan advisors. This voice also serves as a constant reminder of plan-related fees and fiduciary breaches, causing trepidation for any well-intentioned plan sponsor already uncomfortable offering a company-sponsored retirement plan.
Is Downward Fee Pressure on Advisors the Solution?
Do plan sponsors feel they are paying too much? Do plan sponsors feel they are being overcharged? Does the customer long for less service? Less communication? Is the plan sponsor willing to accept less performance? If so, then a complete “set-it and forget-it” strategy just might work. Or a simple laddering of Certificates of Deposit and an index fund might be the solution for clients. But in selecting either of these strategies, how much potential return is left on the table?
Lower fees may not deliver the intended result in an industry where plan sponsors have become accustomed to a high-touch relationship with their investment advisor. Consternation is running rampant in the retirement industry. This may be an ideal time to revise product and service models. Can our industry better serve our clients by altering our thought process to center on Intent, Relationship, Deliverable and Agreement?
Objective: Get every plan participant to a specific revenue-stream at age 65 or normal retirement age.
Change: At least annually deliver a projected funded status statement on progress toward the objective – e.g., “You are on track to achieve 77% of your funding objective.” Regularly communicate and adjust contributions (both employer and employee) relative to the participants’ objective.
Objective: Move our industry from transaction-based service to relationship-driven service.
Change: Plan sponsors should recognize that a retirement advisor selection is a 20- or 25-year relationship.
Objective: Every client does not pay the same fee.
Change: A problem account consumes more of an advisor’s resources. Advisors need flexibility in setting what is considered a reasonable fee. (An advisor should be permitted to charge a premium when working with challenging plan sponsors. Other clients should not share the expenses generated from another client.)
Objective: Have a client’s entire eligible workforce on track for a fully funded retirement benefit.
Change: Make operating agreements/contracts more lucrative for retirement advisors based on:
- Performance-based incentives on investments
- Performance incentives based on the percentage of eligible employees who participate
- Performance incentives based upon the percentage of participants who are actuarially on track for a projected fully funded retirement benefit at normal retirement age
By plan sponsors’ standards, the current “pile-of-money” structure — participant accounts with an arbitrary account balance or asset number — contributes little or nothing to the goal of ensuring that participants have a sufficient benefit available upon reaching normal retirement age.
What would help all involved, in addition to the four points listed above, would be for our industry to take a greater interest in results, relationship and responsibility:
- the results of a participant’s hard work and 25 years of funding
- the relationship (where plan advisors are not subject to a series of 25 one-year contracts)
- the responsibility on the part of the plan sponsor to coach participants into being responsible and retirement-ready.
Staff C. Chalk is the Executive Director of The Retirement Advisor University (TRAU), The Plan Sponsor University (TPSU) and 401kTV. This column first appeared in the latest issue of NAPA Net the Magazine.