In a sense, the retirement industry is going through a negative zero sum game, which will only get more difficult with the DOL’s conflict-of-interest rule. Who are the winners and losers?
In a zero sum game, each party’s gain or loss is exactly balanced by the losses or gains of others, such that if the total gains are added and the total losses are subtracted, they will sum to zero. The major players in this zero sum game include record keepers (I lump TPAs into this side), investment managers and advisors. When all services were “stacked” or bundled, those bundled firm providers “won” no matter how fees shifted. In fact, providers offering “free” record keeping as long as the plan sponsor used their funds grew quickly and accumulated market share rapidly in the 1990s and early 2000s. However, in today’s DC market, services are increasingly unbundled and fees are more transparent.
“Indirect” fees kept DC artificially high, fueled by senior executives’ lack of engagement and confusion among overwhelmed and undertrained HR professionals who had difficulty understanding revenue sharing. It took a nascent and growing group of specialist DC plan advisors and an increasingly aggressive plaintiffs’ bar to shake things up. The fee disclosure regs, just like the new conflict-of-interest rule regarding the fiduciary status of advisors, only accelerated a trend started by the market.
So how is this negatively zero sum game being playing out in DC plans? According to the NEPC, record keeper fees have dropped 50% over the last decade, and advisory fees are said to be going through the same cycle except faster, causing greater turmoil and change. At the table with the highest fees and margins but the least power (being further from the client than advisors and record keepers) are the money managers, who lately have taken the brunt of the negative of the zero sum game as advisors move more assets into index funds trying to maintain their fees.
Is there any stopping decreasing fees in DC plans? Not likely unless the industry resorts to collusion, which will be difficult if not impossible with the spotlight getting brighter under the new DOL rule. The negative zero sum game being played at many DC plans is getting rather uncomfortable for money managers that lack viable target date or index funds, or retirement income strategies, especially with more knowledgeable and engaged plan sponsors looking to lower fees fueled by the rash of DC lawsuits, and advisors looking to increase or at least maintain their fees.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
