One of the highly anticipated panels at the 2021 NAPA 401(k) Summit is focused on strategies on how to avoid that “race to the bottom”—and NAPA-Net readers have given our expert panel some data to work with.
Conventional wisdom says that our industry is in a race to the bottom on fees. Too often, “priced to win” equates to a somewhat arbitrary best-guess on advisory pricing, with a bias toward “low.” The workshop (“Low” Blows: Developing Fees, Defining Services—Features) wanted to get input on a handful of questions that will help shape the agenda for one of the first workshops at the 2021 NAPA 401(k) Summit.
Only about a third (35%) of this week’s respondents conducted satisfaction surveys on an ongoing basis, with another 1 in 10 doing so “only once.” That means, of course, that more than half (55%) do not.
I would rather have open conversations with my clients.
We survey all of our partners annually using NPS methodology.
We ask for Feedback every other year—each year is too often. This has led to improvements in meeting materials, timing and coverage.
I have held an advisory council made up of current clients and COIs and posed many questions to them. Also, sent a survey out last year.
Have thought about it but too busy serving clients to do it.
We are always looking to improve and exceed our plan sponsor clients expectations. Part of that process is to meet with them on an ongoing basis and dive into important factors, issues, concerns etc. and deliver best in class consulting.
Personally, no I don’t. As a firm SageView has used third party sources in the past.
Usually every couple of years, our office is the first stop for any issues so we really know the plans’ satisfaction.
We have in the past but don’t do it as regularly as we should.
In the past we sent them and very few responded.
Typically, twice a year I send them data. Also, as a member of NSTP I can forward them Tax News that NSTP send to all its Members.
I do ask for feedback from the plan sponsor at a minimum of annually. Would like to hear best practices from others.
We’re in close contact w our clients, surveys can be excuses for lack of good communication so we avoid this pandering.
We Service the heck out of our 401k Clients and stay connected including Financial Wellness and Financial Planning if needed. So in my opinion not needed
Note we’re a TPA, not that that should make a difference. We did one maybe 12-15 years ago. Not much came out of it. We do ask if there are additional services our clients might like us to provide on our annual year-end questionnaire. Now I’m thinking we should also ask if there is anything we can do better.
In every annual review meeting.
Client Acquisition & Servicing Costs
Just over half (53%) said they didn’t know the acquisition cost of a new client (47% did).
It was a different matter with regard to the approximate cost of servicing each of their clients. Here three-quarters did know THAT cost.
Time tracking per client and then assessing an estimated hourly rate.
At a general level, not client-specific. Though it has increased over the years.
I used to spreadsheet it and it really varies based on the client and their neediness!
We keep track of time (in relation to advisor/staff salaries—who is doing what), functions, advice, etc.
Depends on size scope complexity and types of account. What part of the team will work on each of the elements and the onboarding set up. If investment menu upgrade is needed. Search process and due diligence etc.
It varies based on the services we provide, but we do segment our services based on revenue.
Approximately based on frequency of deliverables & travel.
It is mostly fixed costs for technology and staffing. It is impossible to predict the time cost because each person is different. Some clients take up more time than others just by their nature.
These are all very good questions, but when I started out in the 401(k) World back in the late 1980s all we cared about was putting new plans on the books, we never thought about the cost to do so and believed that as long as we provided great service we’d always retain the plan.
Years ago I did the Ann Schleck analysis and didn’t like the answer on 2 & 3 above because I work for a big Wirehouse that took 40%, but now because of our scale it’s 50%. Since we don’t charge anything to onboard, I’d say approximately a 2 to 2.5 year breakeven—so servicing & KEEPING clients is key. Outside of the pandemic & mergers, we rarely lose a Client.
Sometimes the amount of work for a takeover or as an ongoing client can’t really be determined until it’s too late.
Fees Based on Costs?
As for determining fees based on the costs of servicing the clients, nearly three-quarters (71%) did, though the remaining 29% did not.
Yes but only as it pertains to education meetings/ number of days/locations etc. Otherwise with the investment consulting side of it, we have to stay in the "reasonable" range regardless by using benchmarkings.
Although I am leaning toward a base price with base services and allow for add-ons.
Yes and no—we do that and also try to benchmark fees for similar size and scope of the plan. We understand our cost but also want to understand the marketplace and competition as well. On an ongoing basis we make sure we are competitive Hard dollar fees only. No bps fees.
The market often decides how we should price a new potential engagement. We are profitable on some, others not, based on what we feel are fair hourly fees, and time/cost to serve the client.
Somewhat, but it is not competitive in the marketplace. If a prospect is too much work for fees we deem reasonable then we do not pursue the prospect.
These are all very good questions to ask. Never thought to develop a “cost for servicing” model as the industry for the most part and advisors, always based compensation on assets under management, which is a model that will be changing quickly as we come out of COVID. COVID has totally changed the dynamics of how business is going to done going forward in the 21st Century.
I base it on the profit I want to make.
We’re a TPA, and I don’t determine the fees—I just work here. But I know we are not charging enough for some audit plans (which, in my opinion, should have a baseline minimum). I think our fees are based on how much we can charge and still get the client, which makes some clients not profitable. I also think it’s OK to have a “loss leader” if we will also gain profitable clients from that same investment advisor. But once they realize we’ll take the difficult clients for “cheap” we just turn into the TPA they turn to for the difficult clients.
Most of our clients receive the whole suite of services we provide; those that do not pay only for the service(s) they choose.
Asked which of their service(s) were most valuable (more than one could be chosen):
82% - Employee education/engagement
75% - Plan design
67% - Fee benchmarking/negotiations
66% - Investment advice/due diligence
Other services noted included: Plan Sponsor Education, Vendor assistance (“Clients are overwhelmed with HR issues and hiring right now so if I can jump in and help manage the vendor relationships they truly value not having to deal with some of those issues”), Compliance/fiduciary best practices, being accessible to plan participants for any random calls, data mining RFP process RK, Advice Targeted communications, compliance consulting capabilities and also our industry insights that we bring to meetings/conversations, participant advice, sounding board, “the silent confidence of being the go to resource for HR and Finance,” Plan Administration Consultation, Fiduciary governance, education and guidance, rollover advice and discussion (for Baby Boomers especially), troubleshooting ongoing issues related to administering the plan (particularly for small-mid size companies who have little sophistication), assisting in navigating issues with carriers and employees, ease of use and good value for fees, guidance/assistance with fiduciary responsibilities, investment fiduciary services, acting as either a 3(21) or 3(38), strategic planning and execution, Fee Benchmarking, participant outcomes, compliance and liability management, the ongoing quality of the services we provide and the success we achieve together with our clients.
One reader explained: “Employers value wise counsel for their business. We focus on the investment part so that our partner advisor can do that which is more valuable.”
“I work as wholesaler for a record keeper,” explained another. “Advisors may think benchmarking and getting the best cost is the most valuable, but we need to change the narrative so that results for employees (savings rate and income replacement) are seen as the most important and therefore most valuable.”
And—asked which one service they thought was most valued:
41% - Employee education/engagement
18% - Investment advice/due diligence
13% - Plan design
12% - Fee benchmarking/negotiations
Others cited included plan design, strategy and consulting, employee education and engagement, financial wellness, participant advice, plan sponsor support and strategic thinking, plan administration consultation, benchmarking and employee education, help with unscheduled services that come up all of the time, technology integration (i.e. Payroll), It depends on the client, and… how to help the highly comped get as much benefit as they can from the plan, and the ability to talk to a real person that works on your plan (and maybe has for 20+ years in some cases) and who will respond directly (and timely).
Just over half (57%) say they offer the same services to all clients regardless of asset size.
Clients dictate what services they want and then I price accordingly. I do not particularly focus on the AUM but rather the work required to provide the services to the number of employees they have.
I am guilty of service creep if I try otherwise.
We provide outsourced fiduciary services for plans. Regardless of asset size, our offering is the same.
BUT it depends on the size of the plan. I’m not going to offer 5 days of education for a $1 million plan. It is all relative to cost.
We have a variety of criteria that we use to score our plans—ranging from A+ down to D. Those who score better get more services offered than those with low scores.
All receive best in class services but we also can customize a delivery model for a complex plan sponsor.
Focus on Fiduciary responsibility and liability is just as critical in a $2 million dollar plan as it is in a $200 million dollar plan.
Usually the plan with the strong HR Dept requires less support.
Not all clients want/need the same level of services. We segment by revenue, not necessarily asset size, but they often go hand in hand.
Plans with less than $10MM do not automatically get in person fiduciary review meetings.
Segmented by client size & revenue.
Our market area is too small to be more selective. Many plan sponsors know each other even though they are in different size markets.
We OFFER - Statement of Service, but rarely do they take us up on ALL.
Generally, yes—however, the frequency of the service model and structure of meetings and deliverables may vary.
Larger clients might have lower or nonexistent direct fees charged by us if we are receiving allowances from their investment provider. But our TPA services are the same. (Other than small plans don’t have audit assistance, since they don’t have an audit.)
All but one of our clients receive our full service package, the other is investment fiduciary only.
As for any closing comments on the subject(s), here’s a sampling:
Clients need to feel the value they receive for their services is appropriate for the fee that is being charged.
Let’s talk about strategies for “realigning” below market business.
Unfortunately the way that most advisors prospect is starting with fees. I believe it’s important to fee benchmark yourself annually, but then remind the plan committee of everything you do—we even log every participant call!
When I lose an opportunity based on pricing, I remind myself to do a better job relating the value of our service and that not all people will appreciate the extra work we do. Some don’t value much... others value everything.
Like to understand from consultants what they are delivering that they feel makes them unique or special in today’s environment.
We do see this race to the bottom and sponsors may pay the price with low cost “advisors” and a lack of experience to serve them with.
The industry cannot afford any more races to Zero. Plans need to know the value of our services. If we don’t value ourselves and what we are due for fees, then the plans won’t. NO MORE RACING TO THE BOTTOM! Pay my fee or go ahead and use a onesy/twosey!
You must have a value proposition and show/prove it out.
We’ve tried to build our book of business with groups that appreciate our value & expertise and are willing to pay for them accordingly. Groups that tend to complain about fees all the time (generally with no basis for doing so, other than they think it’s their job to beat us up on fees) don’t get our top service efforts and don’t tend to stick around long. I’d prefer to replace them with the former group of clients.
I dislike that many times decisions come down to fees, but we have also learned to let them go if that’s all they are about. Then they probably aren’t the right client for our services since we do so much more than the competitors.
As I pointed out above, COVID has changed the World forever and how business will be done going forward. There’s a real dichotomy based upon age as to how information is delivered, rather than being in person delivery it will ultimately become totally digital.
We as an industry should eliminate soft dollars including 12b1s and revenue sharing. The hidden fees give the wrong impression and trigger the race to the bottom. they assume we get paid anyway.
Rarely have had this issue, because we demonstrate our added value all the time. In fact when transitioning many of our Clients to RIA type arrangement we are INCREASING our fees!!
Most sponsors seem to disregard value over lowest cost… they would rather pay the least and get minimal value for it than pay more and receive substantially more value/services.
How do you combat the “race to the bottom” as only mutual fund expense fees (as many providers emphasize) versus total plan fees, including your fees as an advisor (or brokerage commissions). Also, pro/con conversation on fees as per head versus asset based would be nice to discuss from RK/TPA.
As a TPA I would prefer to have fewer clients that pay more and really appreciate the boutique TPA experience. That also would give me more time to do the very best, detailed, job that I can (e.g., providing a mostly- or fully-completed form that just requires signature to make whatever change with their investment custodian, rather than saying “here’s the form” and having them try to complete it themselves). But more and more we have to have more clients for smaller fees, so I don’t always have time to do the job I’d like to do. The clients are still receiving quality and accuracy, but in order to provide the hand-holding they’ve come to appreciate my timeliness has had to suffer simply because of sheer volume of clients. Not to mention I now spend more time at work for the same pay. I want to be Nordstrom, but now it seems like we’re trending toward Kmart. And look what happened to them.
If you provide sufficient value, clients will pay a premium for it. You can’t be the highest cost provider of course, but it allows you to be somewhere in the middle as opposed to being the lowest cost.
Offer more services to broaden revenue opportunities, automate as much as possible and use offshore companies to reduce labor costs.
If advisors and consultants continue to claim their value is getting the best record keeping fee for their clients, there will be 2-4 record keepers left. Record keepers have taken the biggest hit compared to fund managers and consulting fees. It was only a matter of time until consulting fees would be the only pot left for fees to be attacked. And, now I see advisors struggling to articulate their value prop to justify a higher fee because they say they can’t afford to take on business at such low fees. So, my point is that we all have to realize that it’s not an us against them scenario and if consultants want their fees to stop racing to the bottom, we have to change the focus to results that matter for our clients—and getting the lowest fee should not be viewed as the single most important thing.
Fee compression has been healthy as it has assisted plan sponsors in seeing true advisor costs. This is beneficial in squeezing out blind squirrels.
We believe the race to the lowest fees does not help the end users of the employers or employees; instead we charge a reasonable fee to ensure our ability to continue to be competitive, maintain success in our business.
As for how this all comes together—and what (else) you can do to fend off being trampled in the “race to the bottom”—be sure to join us at the NAPA 401(k) Summit, and this specific panel—Sunday, September 12 at 2:30 p.m., immediately following the much-anticipated “Hill to the Summit” briefing from NAPA Executive Director and American Retirement Association CEO Brian Graff.
Oh—and if you HAVEN’T registered yet—TODAY is the end of the Early Bird registration rates! Don’t miss out—sign up at https://napasummit.org!
Thanks to everyone who participated in our NAPA-Net Reader Poll—see you in Vegas!