A Valuable ‘Commodity’

I’ve been on the road a lot over the past several weeks – and I’ve noted a remarkably diverse range of prices in gasoline across various locales.

I think it’s fair to label gasoline a “commodity[i]” – what the dictionary describes as “a reasonably interchangeable good or material, bought and sold freely as an article of commerce.” 

Oh, sure – you may have a preference for one brand or another, you may not care for the political allegiances of their ownership… but when push comes to shove, it usually comes down to price – because, after all, when it comes to gasoline, it’s pretty much the same stuff. 

For years, recordkeeping services – complex and difficult as they can be to provide accurately and consistently (not to mention profitably) – have been characterized (some might say disparaged) as a “commodity,” while fee compression (and the aforementioned complexities) continue to fuel consolidation in that industry. 

Honestly, as a former recordkeeper, I’ve never understood how anyone who had any real appreciation for a business as varied, complex, and demanding as that of keeping up – and keeping up accurately – with individual participant accounts over the course of a working career – would be willing to refer to those services as “interchangeable.” Or why any firm that provides those complex services in these challenging times would be willing to let others do so. Certainly any participant, plan sponsor, or advisor who has seen the integrity of that data put at risk by clumsy and inattentive hands can attest to the impact that a failure to do so. Indeed, I’m shocked by the leaders in our industry who label it as such – leaders that I think might well feel differently if they had spent even a small amount of time in those shoes.

Without question, recordkeeping is not only a challenging business, it is expensive to stay current with technology, to keep processes and programs current not only with changes both in the laws and regulations, but the nuances of individual plan designs. And as if that weren’t enough, cybersecurity has recently emerged as a significant threat – little wonder in view of the enormous amount of sensitive financial data to which these “commodity” producers are entrusted.

Where recordkeeping does seem to have been “transformed” into a commodity business is in the pricing of those services. Like the gasoline drawn from a pump, economists would tell you that, since commodity products are “interchangeable,” they compete (only) on price – and to do so (profitably) requires that that you have to achieve economies of scale – and the continued downward pressure on fees for those services continues to force firms to exit or flee to the embrace of larger players.

Further fueling those trends, the plaintiffs’ bar has latched onto the “commodity” concept, having (apparently) determined that it is “appropriate” to be compensated for these services by a flat per-participant charge ($35 seems to be their notion of “reasonable,” at least for the multi-billion-dollar plans targeted, though the courts don’t seem ready to buy into that presumption just yet). 

I know that over the years there has been an ongoing attempt to “functionalize,” to break the complex process of recordkeeping (I tend to think of it as participant accounting) down into component parts like some kind of mass assembly line – and perhaps some quarters have done so successfully. Perhaps then, at least in some venues, that once ornate, vibrant (though often complicated and tedious) process has actually been reduced to one so regimented and segmented, so parsed out between segregated operational touchpoints that it might there truly be considered a “commodity.”

But my personal experience is that those who find themselves working with a service provider or TPA that views those critical services as a “commodity” will, in short order, wish they weren’t.