Why Do Fees Continue to Compress?

shutterstock_402879268_blogFirmwide we completed our annual review of retirement plan costs, benchmarking them against our peer ranges. Yet again, prices declined, and participants benefited from the compression. For clients, we now routinely see their fees at $100 per participant or less for more attractive engagements.

That means for recordkeeping, custody, call center, web trading, employee education, and frequently legal and technical support, large financial service organizations are getting $100 a year for each account holder they serve. By way of comparison, I pay my high school aged babysitter $12 an hour to watch my 10-year-old read a book when my wife and I have a date night.

While some of the compression can be attributed to vendor consolidation and scale, why would billion-dollar financial services organizations continue to invest in recordkeeping capabilities where profits have traditionally been so thin? The answer is: they believe there is an opportunity to generate additional revenue beyond the recordkeeping fees for servicing retirement plans. Generally, we believe there are five areas where recordkeeping vendors have tried to monetize their relationship with retirement plans:

  • Proprietary investment management
  • Managed accounts
  • IRA rollovers
  • Cross-selling retail financial products
  • Annuitization

All five of the above solutions carry the possibility for the recordkeeper to earn additional high-margin revenue not part of a standard recordkeeping engagement.

Proprietary Investment Management – Many recordkeeping firms also manufacture their own investment products. The products carry asset-based fees and generate highly-leveraged profitability. For many, recordkeeping provides an advantaged position in communicating the benefits of their investment products. While the market has moved away from proprietary investment management, it is still common among target date fund series and general account fixed annuity options.

Managed Accounts – Participants in defined contribution plans continue to be confused with more investment choices than they wish to manage. Many firms are selling managed account solutions, where participants delegate investment management to the recordkeeper. In exchange, the recordkeeper gets an asset-based fee. Managed accounts are highly profitable as the allocation, and investment rebalancing aspects are entirely automated.

IRA Rollovers – For many financial service companies, IRA rollovers are the lifeblood of their sales efforts.  Watch any golf match on TV and see endless ads offering to assist you in rolling over your employer retirement benefit. Recordkeeping firms have become very good at communicating the benefits of rolling over to participants before they arrive at a distributable event and are in the first position to be notified when a participant becomes eligible for a rollover. Once in an IRA account, frequently, the cost for investment products and investment management increase and become more attractive to the financial service company.

Cross-selling Retail Financial Products – For financial service sales people, few things are more valuable than a room full of employed consumers looking to them for help. Some organizations have successfully used employee education, financial wellness, and personal financial counseling as an avenue to discuss other products and financial needs outside the plan, from 529 accounts to life insurance. These solutions carry tremendous margins and the opportunity to capitalize on the value of the participant.

Annuitization – One of the challenges of the defined contribution solution so prevalent in the country today is the lack of certainty related to lifetime income. Insurance firms in the recordkeeping marketplace are continuing to develop insurance solutions for use in defined contribution plans. Whether pure annuitization or guaranteed lifetime income solutions, these insurance driven solutions also carry the possibility of much higher asset-based and general account revenues.

None of the five areas are definitively evil, and each may have a place in the right type of plan. Good investment products should always be used regardless of recordkeeper, and quality managed accounts may improve savings or returns for participants. Assisting participants with assets after termination in an IRA may help them avoid early taxation or penalties. Talking to financial educators about mortgages and college expenses may provide a complete picture of financial health. Annuitizing a portion of a benefit may improve financial security.

The challenge for sponsors is identifying these ancillary areas of revenue, understanding them, and ensuring that they are not done in such a way to victimize already overwhelmed participants.

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.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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