A wirehouse adviser recently contacted me about pricing for a $5 million defined-contribution plan. I asked what services will be provided by level of personnel and what the travel requirements and time commitments would be. His firm recommended a pricing grid.
It made me realize how antiquated retirement plan advisers’ pricing is, stuck in a post-commission world where fee-based pricing once seemed progressive, with the emphasis on committee-level “triple F” — fees, funds and fiduciary — services. The entire method of pricing by RPAs needs to be rethought.
Record keepers and asset managers have been amending fees for different reasons. Pricing for record keeping is upside down, with fees based on assets, while actual costs mostly reflect the number of participants served. When plan assets grow, so do fees, which does not make sense and is the basis for many lawsuits. Charging participants a flat fee penalizes smaller accounts, so a hybrid solution involving a percentage of the first $50,000 to $100,000, and then a flat fee, might be more equitable.
Asset managers or DC investment-only providers, especially active managers, have reduced their fees in recent years. This mirrors institutional arrangements in which larger plans negotiate special pricing, using collective investment trusts or separately managed account wrappers rather than mutual funds. RPA firms like DC aggregators that have significant assets under management have successfully negotiated lower fees on behalf of their clients using CITs.
But the change that’s needed in RPA pricing is even more compelling, affecting outcomes while driving consolidation. And it is happening, slowly.
Though RPAs loathe comparisons to law firms, advisers are professional service providers like lawyers and accountants, who charge based on the work and time spent. More experienced professionals can charge a higher hourly rate — and last time I checked, few of them are hurting.
Charging asset-based fees for all advisory services does not make sense, in part because the work associated with the plan does not increase as assets grow.
It would be better to charge a flat fee for committee-level services based on the experience of the RPA and the quality of the services, then charge for additional services like participant meetings or advising on nonqualified plans for highly compensated employees. Smaller plans that are willing to pay the RPA’s minimum fee could become clients and not be automatically excluded because of their size.
Pension Consultants, an RPA firm in the Midwest, charges additional fees based on key performance indicators, such as investments beating their benchmarks, increased participation and higher deferral rates. That is more akin to a hedge fund manager that charges a percentage of profits on top of a base fee.
RPA firms confident in their ability to help and work with participants can charge what seem like ridiculously low plan fees. RPAs that cannot charge for participant services or bundle benefits and retirement services will appear to be overpriced and will struggle to retain clients or grow.
Baked into private equity firms’ valuations of RPAs is the assumption that participant services and bundling retirement and benefits are important. But those are things plan sponsors actually want — and helping people solve financial issues at work is critical, especially if we hope to assist people with retirement income challenges.
The reason RPA pricing changes have lagged those of providers is because RPAs and lawsuits have exerted pressure. We cannot expect most RPAs to proactively change their own pricing models at the expense of short-term revenue and profits, and lawsuits have not affected smaller plans as much as institutional ones.
Just as with record keepers, the larger RPA firms will use their clout, capital and expertise to drive down pricing while improving quality. They’ll also figure out ways to drive additional revenue, accelerating RPA consolidation, which will refresh RPA pricing, whether the large firms like it or not.
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As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.