There are four potential types of 401(k) clients, some with competing interests. Retirement plan advisers have to choose one client over the interest of others – and that affects the services they provide, their fiduciary responsibilities and profitability.
The four potential types of 401(k) and 403(b) clients include:
1. The sponsoring organization
2. Eligible employees
3. The frontline administrator
4. The plan.
In my first year of law school, my corporations professor asked who shows up in court when the entity is sued. Was it senior management, the board of directors or shareholders? The fact is that the corporation is a separate legal entity distinct from the other parties.
The same is true for defined-contribution plans. The various plan fiduciaries may be responsible, and employees participate, but the plan is a separate entity. That is why the question of whether participant data is a plan asset is so interesting.
The sponsoring organization decides to hire an RPA, so is it the most important client? If so, then the focus will be on the “Triple Fs,” or fees, funds and fiduciary, which we all know have been commoditized, resulting in declining fees for retirement plan advisers.
Senior management might be interested in helping employees, but its priorities are to limit liability, cost and work so the company can serve clients and make money, while providing competitive benefits.
The administrator might not make the ultimate decision to hire the RPA, but they have the power to say “no,” making them both important and dangerous. They too may be interested in helping employees, especially human resource professionals, but they serve senior management and need to get their approval if liability, costs or work are affected. If the administrator is from finance, costs are likely to be paramount.
If your client is the base of eligible employees, the focus will be on helping workers save for retirement and, increasingly, helping with other financial issues. Leveraging relationships with employees to cross-sell financial services becomes imperative as plan fees decline, not just to make money but to distinguish the adviser. But those interests could conflict with those of the organization and the front-line administrator.
The government, especially the Department of Labor, might be the key representative of the plan. Following the letter of the law in many cases is paramount, but some would argue that fiduciary duties are fulfilled if the plan is helping prepare employees for retirement. However, courts and the DOL value process over results – they are loath to second-guess investment returns and are focused more on fees and the selection and monitoring of investments and co-fiduciaries.
Issues become even more complicated if the RPA’s broker-dealer tries to sell proprietary products and services. That is most common with entities where the adviser is an employee, like wirehouses, but also with aggregators eager to cross-sell wealth and benefit services.
Who is your client?
The answer is: All of them. That is why the defined-contribution industry is so complicated and unattractive to most financial advisers, especially those who dabble in the 401(k) market. The fees are lower than in wealth management. There are numerous, and at times competing, client interests. And there’s the big bad Employee Retirement Income Security Act, which invokes oversight by the DOL and IRS, while advisers still have to deal with the SEC and state lawmakers. Wealth management is much simpler and more profitable.
So why are RPA valuations so high? First, they are not as high as those of wealth managers. Second, DC plans offer access to 90% of participants not served by traditional financial advisers. Getting the true value out of DC plans is fraught with danger and can be a long and winding road that is difficult to navigate.
2020 brought human capital management practices into focus
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.