As defined contribution plan sponsors evolve from being consciously incompetent to consciously competent, all eyes turn to their retirement plan advisor. According to Fidelity’s 2023 Plan Sponsor Attitudes Study covering 1,351 plans with 83% between $3 million to $250 million in plan assets, the main theme is, “Rising complexity creates opportunity for greater advisor impact.”
But there is a serious disconnect between what plan sponsors want and how advisors evaluate themselves. And as plan fees decline potentially reaching zero, there is more pressure on advisors to either sell proprietary services or pitch those for which they get an additional fee rather than acting as an independent third party being compensated to evaluate, recommend and monitor all other products, services and providers as a co-fiduciary.
This existential issue is at the heart of the current and past iterations of the DOL’s fiduciary rule and while RIA industry pundit Michael Kitces’ recommendation is to just label advisors selling a product a “salesperson,” a solution some ERISA legal experts echo, does it make sense for an advisor to wear two hats—sales person and fiduciary?
So as plan sponsors wake up demanding more from their advisor than the Triple Fs, realizing the opportunities that the convergence of wealth, retirement and benefits offer to themselves and their workers, they cast a more critical eye to their advisor, which is likely to cause massive change. Fidelity reports 22% of plans were actively searching for a new advisor in 2023 with 37% making a change over the previous 12 months.
Advisors have and will continue to play a critical role for plan sponsors—41%, according to Fidelity, want them to act as an objective third parties, along with improving participant outcomes and helping them save time. Meanwhile, advisors rate themselves based on the number of activities, participation and contribution rates as well as reducing provider and investment fees. What a monumental disconnect!
Record keeper and investment fees have declined while service and quality has increased because of the tireless efforts of RPAs. But now the focus turns to the advisors’ role and whether a plan needs to make a change or at least conduct the type of due diligence advisors have told clients and prospects they need to do for their providers and funds. And when record keepers sell, advisors pounce, offering due diligence services for clients of the exiting provider—is the same not true for acquired RPA firms?
While benchmarking, RFIs and RFPs are all valuable, they serve different functions. Benchmarking is backward looking and can be manipulated based on the data set used, especially if a provider or advisor is conducting the review on themselves. RFPs provide a more accurate picture of current market rates while also uncovering what the plan and participants need and want. RFIs also provide more a more current picture but it is cursory with limited interaction.
So with all due respect to the Fidelity survey, the rate of advisor change still seems much lower mostly because of the “relationship coma” as well as the power of inertia and limited independent third parties to help plan sponsors. The “brother-in-law/golfing buddy/financial advisor” relationships still have power as Fidelity reports 29% of plans switch advisors because the advisor had a connection with a committee member.
Advisors that get ahead of the trend, not just advocating that prospects conduct an independent due diligence or search for an advisor, which will exponentially speed up the process, but also advocate their clients do the same will be viewed much more favorably than those that resist. Because if they do not, someone else will, which is not just likely—it is inevitable.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.