Participant “Education,” Consulting Firms Trojan Horse to Selling Products

Last year, I wrote a piece outlining how many retirement plan consulting firms are changing their structure and approach to monetizing client relationships.  Today, I’m highlighting the most recent area of change by retirement plan consulting firms; employee communication.

Throughout 2018, we published a number of pieces on the impact of fee compression on recordkeepers.  One of the potential avenues a recordkeeper can use to monetize low margin recordkeeping business is  to use their relationship with the plan participant to sell retail investment products.  Those sales efforts may take place either in person or digitally.  Both issues have been the subject of recent litigation and enforcement by the SEC. 

Participants, in need of help and short on time, are frequently eager to identify individuals to help them better understand their retirement benefits. This provides a window of opportunity for consulting firms looking to monetize their participant relationships.

The delivery of in-person education, planning, and advice services is costly to the service provider which is generally not leverageable.  It requires an individual to prepare materials, travel to a client site, meet with participants, and complete  follow-up work coming out of those sessions.  All of that time is compensable and can’t be leveraged elsewhere.  As a result, you would expect that the more time needed to deliver that communication, the more expensive education would become.  However, employee communication costs may not correlate to higher costs depending on the model of delivery.

Increasingly, providers have been using employee communication as an opportunity to broaden the discussion of financial wellness.  Doing so creates opportunities to sell products and services outside the scope of a retirement plan engagement and not subject to the ERISA governance standards of care.  Between rollover IRAs, 529 opportunities, and managed account opportunities outside the plan, having preferred relationships with participants can be successfully monetized.

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More and more investment consulting firms are attempting to combat fee compression they are facing by providing the employee communication function. In many cases this is an easy sell to plan sponsors because of their trusted relationship and plan sponsors’ concerns over cross-selling by their recordkeeper. They believe that if they hire an “independent” provider it will better protect them from the recent litigation trends.

Regrettably, that is likely not the case.  Unless the consultant is contractually prohibited from cross-selling, you have merely replaced one salesperson with another.  Frequently, consulting firms delivering employee education have even less controls on the behavior of their employee educators than the recordkeepers they are replacing. 

The job of a retirement plan consultant is to independently provide advice to plan sponsors to aid in the monitoring of their providers (investment managers, recordkeepers, employee educators) as required by law.  The independence of that review is lost as consultants fight with recordkeepers over a limited revenue pie.  Further, the ability of a consulting firm to objectively assess the quality and value of their employee education services would seem suspect.

Does that mean a sponsor should never retain a consulting firm to deliver employee education?  No.  However, the sponsor should be aware of any conflicts that arise when making that choice and implement adequate monitoring procedures and contractual controls to address them.

While sponsors allowing their data to be used by financial organizations is the subject of current litigation, the same claims will undoubtedly be leveled against sponsors who have handed off the employee education to a consulting firm similarly motivated to sell products and services unrelated to the plan.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

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