Are you participating in the retirement plan industry’s
infamous “race to the bottom”? The race has many more participants than
spectators, and observers may find it is very difficult to stand on the
sidelines. The race to the bottom refers to the fees advisers charge their
all advisers have exposure to eroding fees within and among the individual
markets where they conduct business.
Technology, media, competition, politicians and regulators
all fuel the retirement plan industry’s journey toward ridiculously low
pricing. However, those are only influencing forces. It takes an adviser to
accept, implement and support the self-destructive behavior of charging less.
Cannibalism from within our industry is currently leading advisers down a path
of no return.
Know Your Services
Basic, yet vitally important, is the need for each
retirement plan adviser to have a full awareness of exactly what he delivers.
If you are stumped by how to articulate your true value, you need to either get
up to speed or exit the retirement plan industry. As a retirement plan adviser,
you are likely responsible for successfully influencing the savings habits and
outcomes of hundreds, or even thousands, of plan participants.
What is it that you deliver? Is it a series of funds from
which the plan sponsor may choose, or is it much more? If you are striving to
deliver a specific percentage of plan participants to an 80% income replacement
ratio upon their reaching age 65, then you must charge more than your neighbor
who is simply providing a list of funds for the plan sponsor. There is no
system available today that permits those two models to profitably compete at
the same fee.
Know Your Margin
Unless you are a not-for-profit, it is your duty to know how
much you must earn in order to remain a successful adviser within the
retirement plan industry. You are of limited value to your client base if you
cannot be there for them throughout their marathon run to save—from the start
of their career up until retirement age. After expenses—for technology, staff,
benefits and travel—what do you and your family need to live? Is it $200,000?
More? Less? Retirement plan advisers need to know this number much better than
wealth management advisers, because you are working with much slimmer margins
and must always be in the position to pass a “reasonableness test” with and for
whoever may challenge you on pricing. When computing your firm’s required
margin, technology and internal efficiencies become your best friend.
Beware of the trap that has ensnared many advisers, who tell
themselves, “Now that I have a good base of clients covering my fixed costs,
the next client will cost me next to nothing.” Servicing clients rarely costs
nothing. However, if you choose to match the pricing of your struggling
competitor, your margin can be dramatically reduced. If that becomes the case,
how will you get back to the margin you require? Will you make it up in volume,
which was the mantra of the “not-for-profit,” overzealous Internet startups in
the 1990s? Will you choose to overcharge the next client that comes through the
door, in an effort to get back to where you need be?
Remaining a Spectator
It’s not easy to sit on the sidelines and watch others win
the business with a low-fee model. Once the business has been awarded to a
competitor firm that has low-balled its costs, you have a little bit of work
left to perform. In such situations, it is prudent for the astute retirement
plan adviser to speak with two of the interested parties—the plan sponsor and
Wish the plan sponsor the best, and explain that you will
always be there to provide advice if the winning firm is unable to deliver the
services that you had proposed—leaving a favorable impression in the
face of adversity is never a bad tactic. With your competitor, ask how it has
become so successful at running such an efficient shop. Sure, the tactic might
be tongue-in-cheek, but you may also learn a new way to look at how you deliver
Some races you do not need to win.
Steff C. Chalk is CEO
of the Fiduciary Consulting and Governance Group, a fee-only fiduciary
consulting practice serving corporations and nonprofits. A judge for the
PLANSPONSOR Retirement Plan Adviser of the Year Award and a faculty member of
PLANSPONSOR Institute, he is also the co-author of “How to Build a Successful
401(k) and Retirement Plan Advisory Business.”