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Supply Chains Disruptions at Highest Rate in 3 Years

How RFPs changed the 401(k) Record Keeping Business

And how it could affect advisors.

At a DCIO meeting for top advisors in Boston right before the 2008-09 recession, there was a panel with the heads of sales for three top record keepers. By then, RPAs had begun growing their business acting as co-fiduciaries but also by promising to lower record keeping costs through RFPs.

The panel of providers pleaded with RPAs to stop. They explained that they could not decrease costs anymore without adversely affecting services. Standing in the back of the room I wondered, “Then why are each of you making well over $1 million and why are we at the Four Seasons?”

We all know how the story ended. Massive consolidation with survivors using scale to weather the blitz of RFPs led by RPAs who either enticed prospects with the promise to help them save money and/or the fiduciary threat if they did. Benchmarking tells what providers are charging for current clients – RFPs uncover what they are willing to charge for new client or to save a current one.

The crux of the issue is that if every record keeper had been forced to reprice all plans, most would go out of business – many did. (All three of the providers at that Boston conference have either sold or merged.) Providers cannot be expected to reprice all plans proactively – they are not fiduciaries. Currently, there are 43 national record keepers serving the 401(k) market of which 28 work with advisors and just nine serve almost all size plans.

But the rules are changing again. Scale, which was needed to survive, is no longer enough as leading providers look to offer wealth and benefit services to clients as well as proprietary investments, especially TDFs and managed accounts. Just as equity plan providers like Fidelity, JP Morgan, Morgan Stanley and UBS offer their services at no cost as long as they have access to participants, 401(k) plan fees will eventually go to or close to zero leaving those stuck in the old paradigm without a seat at the table fueling the next wave of consolidation.

RPAs face a similar but entirely different set of challenges. Rather than 130 record keepers that were in business before the Great Recession, there are 13,000 RPAs who get at least 50% of their business from DC plans – there are another 63,000 with 15-49%. Advisory practices, which are basically consulting services, are harder to scale. And there is a deeper, personal relationship with the advisor who may own the firm.

But most RPA firms would struggle if all their plans went to market and were repriced to current levels moving to flat fee.

Fueled by private equity, RPA Aggregators are changing the rules of the game through M&A. At the first RPA Aggregator Roundtable in 2018, Fielding Miller, CEO and founder of CAPTRUST, declared that participant fees “dwarf” plan fees evidenced by recent reports that they bid $35,000 for a +$1 billion DC plan banking on their ability to more than make up what they may have lost in wealth services.

Other RPA aggregators, like NFP Retirement, started co-creating products through flexPath which has been such a big success that their PE owner split them up driven in part by the Woods lawsuit and the potential conflicts of interest of a co-fiduciary selling products and services for which they are paid an additional fee.

As plan sponsors wake up, going from unconsciously incompetent to consciously incompetent on the road to consciously competent, they are realizing a few things. First, the record keeper’s reps are different than an independent advisor. Secondly, their advisor ought to be a co-fiduciary. And, finally, the most important decision they can make is picking the right advisor.

Though it has not happened yet, DC plan sponsors will heed the lessons and warnings that advisors so wisely and vigorously explained that they must conduct periodic due diligence for all vendors paid out of plan sponsors, even co-fiduciaries. An advisor can be impartial only when they have no pecuniary interest in which vendor, product or service is selected. Obviously, the selection, and therefore due diligence of an advisor is and cannot be impartial if conducted by that same advisor nor can they act as fiduciaries for any service that they are paid extra above and beyond a flat fee or asset-based charge.

So what would happen to most DC advisory practices if their plan fees were at or close to zero? Those that cannot offer participants services, which is what most DC plan sponsors want now, will scramble to compete with those who can like CAPTRUST. It is a true paradigm shift which may be accelerated as RIAs with deeper wealth management resources and expertise enter the DC market.

And just as the record keeping industry was forced to transformed when RPAs took them to market through RFPs, the RPA market will be transmuted most likely for the better through unconflicted third parties, technology and RIAs who can also serve participants, particularly in the small plan market.

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