Retirement plan advice industry in new growth phase

At the inaugural InvestmentNews Retirement Plan Advice Think Tank in New York on March 28 and 29, much of the discussion was about collaboration — between aggregators and providers, and among themselves. Why now, and what were some of the ideas discussed?

The defined-contribution industry is at a tipping point. Not only is there more attention on retirement in America from courts, federal and local governments, and the mainstream press, but the DC industry is moving into a new phase driven in part by technology and fee compression.

The Department of Labor’s fiduciary rule heralded the existence and role of fiduciary advisers. But DC plan sponsors are just beginning to realize that advisers specializing in retirement plans are different, which is especially important when almost everyone is calling themselves fiduciaries.

The DC service model is different from, and infinitely more complex than, wealth management because multiple entities have to partner to provide what should appear to be a seamless and integrated service to a client (the plan sponsor) buying on behalf of another party (the employees).

Fee compression is forcing consolidation in all sectors. Rather than view the current situation negatively as a zero-sum game among advisers, record keepers and asset managers — or even worse, a knife fight in a dark corner — there was refreshing discussion at the think tank about a potentially expanding market. So, everyone could benefit while providing better solutions and outcomes for plan sponsors and their employees.

Some of the specific ideas discussed included:

• More robust data sharing among aggregators and record keepers.

• Help from record keepers and asset managers with training aggregator staff.

• Co-creation of investment products.

• Better ways to service participants, which might also create more revenue opportunities.

The aggregators were especially open with each other, recognizing that there are greater opportunities to compete against large-market investment consultants that do not or cannot provide participant services, and against less-experienced plan advisers without the resources aggregators provide.

There also was significant discussion about how the government and the mainstream press need to hear from aggregators and specialist plan advisers rather than just from Washington-based, industry-funded lobbyists. The aggregators were eager to foster a new voice telling a different story and creating a more positive narrative.

Not only do aggregators need to let plan sponsors know about their existence and the advantages they provide, they also need to alert advisers who want to specialize in the DC market about the various options aggregators provide, from buying practices to simple affiliation. There’s a need for plan advisers who want to grow faster by off-loading non-revenue-generating tasks involved with running a business, especially with fees shrinking and demand for services rising.

Lowest-cost options

Just as advisers are concerned when their clients or prospects pick the lowest-cost adviser who may not have the resources to provide the necessary or promised services, record keepers at the think tank asked advisers to be sensitive about picking the lowest-cost provider. It may backfire when service suffers, putting more burdens on advisers and their staff, or when record keepers exit the market because of improper pricing.

Difficult issues were also discussed, especially those between record keepers and advisers. Among themselves, aggregators expressed that providers could become competitors, especially if they are willing to act as fiduciaries.

Other questions included: Who owns the participants, especially the potential downstream revenue? The answer depends on who you ask. Neither the record keepers nor the advisers were willing to concede to the other.

And who owns the participant data, especially the data that can be mined for many lucrative opportunities? Should advisers pay for access to data that record keepers gather and house at great cost? How do record keepers deal with cybersecurity issues related to sharing data with third parties?

Regardless of the difficult issues and natural competition between aggregators in attendance, the consensus among all parties was that a healthy discussion and more collaboration are necessary and beneficial for everyone, especially plan sponsors and participants.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University.