Is Fidelity competing with retirement plan advisers?

As the mutual fund giant expands the breadth of products and services it brings to the retirement market, some say it is encroaching on advisers' turf

Feb 17, 2018 @ 6:00 am

By Greg Iacurci

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Fidelity Investments​ is the undisputed titan of the retirement marketplace.

With $1.64 trillion in defined-contribution-plan assets under its belt, the Boston-based mutual fund company administers more than $1 trillion more in DC-plan assets than its closest competitor, and controls roughly 23% of the $7 trillion market. As one of the fastest-growing providers, Fidelity is more than maintaining its sizable lead.

But some financial advisers fear the titan is starting to infringe on their turf. Those advisers are wary of recent business maneuvers Fidelity has made, which they claim compete directly with them.

Advisers say such moves — like providing fiduciary 401(k) investment advice to employers and serving as the broker through its new employee-benefits exchange — combined with Fidelity's massive scale could put them in a tough spot.

(More: Fidelity, Empower and T. Rowe take three different approaches to the DOL fiduciary rule)

"They're the 800-pound gorilla, so you kind of have to be close with them. But they're competing with us," said Blake Thibault, managing director at Heffernan Financial Services, which oversees around $3 billion in retirement plan assets.


The majority of financial advisers provide services to at least one defined-contribution plan — around 250,000 of the roughly 300,000 active financial advisers in the U.S. do so, according to The Retirement Advisor University.

As noted, at the end of 2017, Fidelity provided record-keeping services for more than $1.6 trillion in DC-plan assets, in more than 22,000 plans.

When the Department of Labor's fiduciary rule took effect in June 2017, Fidelity adopted a policy unique among its record-keeping peers.

Essentially, Fidelity would help employers assemble a fund lineup for retirement plans with less than $50 million, and would do so as a fiduciary — a core service of advisers who are fairly specialized in the retirement market.

Advisers such as Chad Larsen, whose Denver-based advisory firm oversees more than $3 billion in retirement assets, have felt Fidelity's competitive pressure firsthand. A year ago, one plan sponsor considering using Mr. Larsen's firm as a 401(k) investment fiduciary backed off after hearing from Fidelity, the plan's record keeper, that it would offer its fiduciary service at no additional cost, Mr. Larsen said.

"They said, 'We appreciate it, but Fidelity is going to take care of this at no charge,'" said Mr. Larsen, the president and CEO of MRP.

Jason Chepenik, managing partner at Chepenik Financial, encountered a similar situation with a prospective client, who asked why the company should hire a third-party plan adviser when Fidelity would do it for free. Ultimately, the prospect asked Fidelity to handle it directly, said Mr. Chepenik, whose firm oversees more than $1 billion in DC-plan assets.

"That word 'fiduciary' is getting attention in the marketplace. If [Fidelity] can use the word too, clients can't tell the difference," he said. "Every time they use this term, it minimizes the role we offer and clients think they don't need us."

Fidelity acts as a "point in time" fiduciary through its service. Rather than provide investment monitoring and advice on an ongoing basis, Fidelity advises plan sponsors at the point in time at which a plan sponsor seeks guidance on its fund lineup, explained Sangeeta Moorjani, Fidelity's head of workplace product, marketing and advice.

23%Portion of the DC market controlled by Fidelity

Fidelity executives are adamant the service doesn't compete with advisers, saying Fidelity promotes the service with clients that don't have an adviser or whose adviser currently doesn't serve as a fiduciary (and doesn't want to).

"If a plan sponsor is not utilizing an adviser, obviously this is a need they have and this is where we've stepped in to make sure we can help," Ms. Moorjani said of the company's service.

It caught the industry's attention because no record keeper outside of Fidelity adopted an employer-level fiduciary strategy in response to the DOL fiduciary rule, advisers said.

Not everyone believes that Fidelity is going after advisers' businesses, or, at least, that it is doing so intentionally.

(More: Fidelity reveals three new big-data tech tools)

"I don't think you can be a scale player, optimize all your investments in technology and be blocked off from competing head-to-head in some categories," said Neil Bathon, managing partner at Fuse Research Network, a consulting and market research firm. "I think you'll see more of it [among other providers]."

Other providers, such as Empower Retirement, said they would serve as a fiduciary to plan participants by providing advice on rollovers into IRAs, for example, but not to plan sponsors. Others like T. Rowe Price elected not to serve as a fiduciary to participants or plan sponsors.

Fidelity executives said the DOL fiduciary rule, which raises investment-advice standards in retirement accounts, turned client interactions previously considered non-fiduciary in nature into fiduciary advice, and the company's strategy helped to continue the same level of service.

Ms. Moorjani said "several thousand" plans have used the fiduciary service to date, but she didn't have an exact figure.

Fidelity, like many other 401(k) record keepers, also has a workplace financial wellness program that helps employees manage things like budgeting, debt, household savings and insurance. But retirement advisers also offer these programs.

Mr. Thibault of Heffernan Financial Services provides a financial wellness service to clients for an additional fee, but in one recent instance he found himself competing with Fidelity when it approached his client offering to provide its service for no extra fee.

"It's kind of in a direct-threat capacity to advisers like Heffernan," Mr. Thibault said. "Most other record keepers understand our value and look at us as partners to help them grow their business as well."

Ultimately, the client selected Heffernan's financial wellness service.


Some retirement plan advisers who consult with employers on employee benefits such as company health plans, or those who are part of advisory groups with separate employee-benefits units, see a potential emerging threat in Fidelity Health Marketplace.

Fidelity launched the service in early 2016. It's a private exchange offering small and midsize companies — those with between 30 and 2,000 employees — health, dental, life and disability insurance benefits, as well as other things like health savings accounts. Importantly, from a competitive standpoint, Fidelity serves as the benefits broker and provides "full-service support" to clients, the company said in its initial service announcement.

"Fiduciary and health services are services we offer through our organization, so I could definitely see those as a potential threat to our livelihood," said Steve Wylam, a partner at Shepherd Financial, which oversees roughly $1 billion in retirement plans. (Shepherd Financial is part of Shepherd Insurance, which provides employee-benefits consulting in addition to other services.)

Fidelity's not the only retirement-plan provider to also distribute employee-benefits products. Massachusetts Mutual Life Insurance Co., for example, launched a similar exchange, BeneClick, in 2015. However, MassMutual doesn't serve as the broker like Fidelity — its model provides for distribution through advisers.

Fidelity says its primary objective is to offer the service to existing defined-contribution and payroll customers. The company expanded the service to 10 states in 2017, but didn't say how many clients use it.

Advisers don't see Fidelity's employee-benefits brokerage as an immediate threat — it's still a fledgling business, and advisers reached for this article haven't yet witnessed any encroachment on their turf by Fidelity.

"they're trying to become the amazon." Blake Thibault, managing director Heffernan Financial Services

"We're aware they're in the space but haven't seen any traction," said Kyle Anthony, the director of human capital at Oswald Cos., which has both employee-benefits and retirement services divisions.

Jania Stout, leader of the Fiduciary Plan Advisors group at HighTower Advisors, believes Fidelity is making a concerted effort not to step on advisers' toes. Fidelity representatives told her the company wouldn't market to employers whose retirement advisers also do benefits consulting.

But as retirement advisers begin to look more seriously at adding health savings accounts into their advisory services, they may increasingly bump up against Fidelity.

"Now that HSAs are becoming a bigger topic, I think more and more retirement advisers will come up and touch the health side more than ever," Ms. Stout said.

Ms. Moorjani of Fidelity said the company's distribution is structured to help clients whether they have an adviser or not.

"We want to make sure we're serving the needs of the plan sponsor," she said. "If there's an adviser we'll make sure the adviser is very well integrated in how we work with the plan sponsor. And if there's no adviser, we're able to service the plan sponsor holistically."

In many ways, Fidelity, more so than its record-keeping peers, has become the Amazon of financial services, reaching its entrepreneurial tentacles into a multitude of business lines, advisers said.

Aside from providing retirement plans and employee benefits, it offers asset management and investment products, custody and clearing for registered investment advisers, payroll, managed-account services for retirement plan participants, and automated investing services (or robo-advice) for retail investors, for example.

"I would say they're unique in the way they're trying to become the Amazon," said Mr. Thibault of Heffernan Financial Services. "My fear is they're getting away from some of their core competencies, which have been asset management and record keeping. It scares me. If they think they can do it, they're going to get rid of partners like independent advisers like Heffernan who are advocates for our clients and their participants."

Fidelity spokesman Michael Shamrell doesn't believe the company is straying afar, saying it's working closely with advisers to "provide new offerings that expand on our core competencies and can help meet the needs of our shared clients."

Fidelity launched its robo-advice platform, Fidelity Go, in mid-2016. The company is by no means the sole provider of robo-advice — Vanguard Group, Charles Schwab Corp., and early adopters Betterment and Wealthfront Inc. offer robo services, for example, and have attracted tens of billions of dollars in aggregate. Advisers have looked at such platforms, which offer relatively low-cost investment advice, as a form of competition.

Schwab, too

Schwab also has endured criticism from advisers due to its recently launched hybrid robo, Schwab Intelligent Advisory, which give investors access to financial advisers in addition to online advice and therefore pits it against advisory firms to which it provides custodial services.

"As the needs [of plan sponsors, participants and advisers] evolve, we need to be relevant to our customers and we evolve with them," said Ms. Moorjani of Fidelity. "That's how we develop the right products and solutions for them."

Advisers have also indicated that Fidelity, which has had a payroll product for years, has begun to market the service much more aggressively to small employers within the past few months.

Integrating payroll and 401(k) administration can be hugely beneficial for employers — the automatic data transfer it facilitates is more efficient than having a human-resources department manually enter information, which is the case when there is no payroll integration, advisers say.

Internal-sales-desk representatives at Fidelity have been asking Mr. Chepenik during phone calls if he's aware Fidelity has a payroll product and suggesting he talk about it with clients, said Mr. Chepenik, who explained that hadn't happened in the past.

"It's very apparent they're making it known they're in the payroll business," Mr. Chepenik said of Fidelity. "Never before."

While this service doesn't compete with advisers, it's one way Fidelity can quickly gain more 401(k) clients and become bigger yet. It's telling that Paychex Inc. and ADP Retirement Services, two large payroll providers, also happen to be the two largest retirement plan record keepers as measured by the number of DC plans to which they provide services.

Fidelity is already among the fastest-growing record keepers — it expanded its DC-plan assets 69% over 2011-16, according to an InvestmentNews analysis of sister publication Pensions & Investments data.

Compared with the 10 largest providers by assets, Fidelity placed behind Empower Retirement, much of whose growth was fueled by a large acquisition, Conduent Inc. and Bank of America in terms of percentage growth. Fidelity gained more than $650 billion over that period, more than double the closest competitor on a dollar basis.

"Payroll touches everybody. If Fidelity has the payroll [in addition to the 401(k)], it's harder to lose that client," Mr. Chepenik added.

Some retirement advisers and industry observers shrug off Fidelity's moves as sound business decisions, and believe the company is making an effort to balance its interests with those of advisers.

"They seem to work through us in all situations at this point," said David Kulchar, managing director of retirement plan services at Oswald Financial Inc., which has more than $5 billion in DC assets.

Similarly, Fred Barstein, founder and CEO of The Retirement Advisor University, sees Fidelity as wanting to work with advisers and said "they've made a really concerted effort to do that."

"But they're not going to avoid competing with them if they see an opportunity," he said.


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