The race to the bottom is accelerating, and the bottom is nowhere in sight.
Even before the regulatory spotlight shone brightly on defined-contribution plan fees as the result of Department of Labor rules promulgated in 2012, many plan sponsors, driven in part by plan advisers, were focusing on fees. Lowering plan costs got many experienced advisers in the door and became one of their major value propositions.
But that strategy has affected not just record-keeping and money-management fees; it has also affected advisory fees, and it shows no real signs of letting up. There are market forces at play that could continue to depress advisers' fees even further.
During 2016, adviser fees declined 12.5% for plans with $50 million to $400 million in assets, according to Michael Muirhead, senior vice president at Fi360 Inc., which tracks defined-contribution-plan advisory fees. There was, however, a recovery for DC plan advisers covering plans under $25 million, who saw 1% increase; advisers to plans under $5 million experienced a 4.7% increase.
"There has been constant [advisory] fee compression in a race to the bottom [since 2007]," Mr. Muirhead said.
Record-keeping fees leveled off last year, according an annual study conducted by the consulting firm NEPC, which indicating that for the first time since 2010, there was no fee decline. Asset management fees are also under siege as more plan assets move into passive investment strategies and large advisory groups are negotiating lower fees with active managers within custom-built products.
So will DC adviser fees begin stabilizing? Likely not any time soon.
With increased regulatory scrutiny on fees and more litigation, plan sponsors will continue to be more, not less, price-sensitive. They are also becoming more sophisticated buyers. And as margins get thinner upmarket, consultants and elite advisers will migrate down-market, bringing more competitively priced fiduciary services with them.
Mr. Muirhead suggested that the increase in small-market adviser fees in 2016 may have been a "quirk" related to the DOL fiduciary rule, which raised investment advice standards in retirement accounts.
"When other countries have instituted a fiduciary rule, there is a shake-out of generalist advisers, resulting in fee compression and then price recovery," he said.
DC advisory fees could continue to decline as consultants and elite plan advisers attempt to move down-market, where there is less fee sensitivity and margins are more attractive.
So elite advisers who focus on DC plans with $25 million to $500 million could see increased competition from institutional consultants with packaged products. Because of scale, leverage and perhaps inefficient pricing, institutional consultants and elite advisers will surely price their services more competitively.
Take Mercer, an institutional consultant, which introduced "Wise 401(k)," a fiduciary investment service, in 2016 largely to due to fee sensitivity, as the company indicated in the announcement of its launch.
Elite plan advisers who struggle to create a viable service model for smaller DC plans may find opportunities to leverage open multiple employer plans (MEPs), which bring together several small employers in a shared retirement plan. Experienced plan advisers may also leverage Morningstar's Plan Advantage product down-market; it was designed to help broker-dealers manage the risk of non-fiduciary advisers working with 401(k) plans, by handling record-keeper and investment selection instead of the adviser. Broker-dealers like LPL Financial and Morgan Stanley have also created scalable small-market solutions that outsource some of the mundane and repeatable tasks.
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.