The danger of focusing on retirement plan participant outcomes
While some plan advisers talk about shifting their focus, few have changed their business models to reflect this new focus
The accepted wisdom among the retirement plan adviser intelligentsia is that Triple F advisers, those focused on fees, funds and fiduciary, are passé at best and dangerous at worst. Some elite plan advisers self-righteously proclaim that we must shift the focus to improving participant outcomes.
But few have changed their business models to reflect this new focus, and even fewer have put their money where their mouth is. Most still charge an asset-based fee and pride themselves on their status as a fiduciary, their skills at negotiating lower fees and their ability to select superior investments.
An award-winning, high-profile defined-contribution plan consultant recently won an award from a prestigious organization, along with her plan sponsor client, because she was able to dramatically reduce investment and record-keeping costs. Really?
Don’t get me wrong — plan advisers still need to take care of the basics. But it’s like saying that an automotive company should be awarded for providing a steering wheel. The Triple Fs are table stakes, not grounds for an award.
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The danger is that sanctimonious talk without real action or, more importantly, without real results, can lead to less-than-optimal outcomes for participants even as we think we are helping.
As with financial wellness, there’s a lot of talk about outcomes. But who is really measuring results or dramatically changing their business model?
As an example, the Society for Human Resource Management’s 2019 Benefits Survey, which covers plans with less than $250 million in defined-contribution assets, shows that only 42% of plans deploy automatic enrollment for new employees (22% do for current workers), and just 19% offer auto escalation. The most important measure — the income replacement ratio — is hard to find anywhere.
Needless to say, we have a long way to go.
So rather than self-righteous talk and awards, the industry — especially American workers — need action. That comes through aggressively pushing and helping more clients to adopt auto-features, which are proven techniques to boost income replacement in retirement. The real question is how.
It might start with a change in advisers’ business models and internal focus, along the lines of what one large independent DC consultant in the Midwest has adopted.
Pension Consultants Inc., based in Springfield, Mo., has just under $4 billion in assets, mostly in the 88 DC plans it manages. Started in 1994 by Brian Allen, Pension Consultants quickly moved to a fee-based fiduciary model, before that came into vogue.
PCI has gone beyond talk by moving to a flat-fee arrangement in which the company does not get paid investment-related fees unless it beats the benchmark. If it beats it by 26 basis points net of its fees, it get additional compensation. Performance is measured for the period of time a plan has the fund, not the one-, three- or five-year averages.
Fees in new client contracts are based on boosting income replacement over the 70% level and keeping record-keeping fees under the industry averages, with a bump if they are in the 25th percentile. PCI professionals, even the advisers, get paid a salary and bonus based on these key performance indicators and a few others.
“Once we changed the internal focus on outcomes, the culture of our company changed dramatically,” Mr. Allen noted.
He wants to shift the way DC plans select advisers from image and brand to performance, which he hopes will happen through more adviser RFPs which, by the way, most retirement plan advisers still resist. No surprise
So it’s all well and good to say, “I’m squarely focused on outcomes.” We need to educate plan sponsor to focus on the performance of advisers and their business and compensation models, not their image or their sanctimonious and oftentimes hollow words.
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Fred Barstein is 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.
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