Preparing for retirement is a big a business. An estimated 52 million American workers have over $4 trillion in more than half a million 401k plans. That’s a lot of money by any reckoning, and yet most plan participants have no idea how much of what they put away out of each paycheck actually goes toward their retirement savings and how much is eaten up by the 401k fee.
That is starting to change following the Department of Labor’s ruling that retirement plan sponsors are fiduciaries required to act in the best interests of plan participants. Transparency regarding fees has been a major emphasis of the DOL effort to reform the retirement plan system.
Since the election, there has been speculation in many quarters that President-elect Trump will either outright rescind the rule or instruct his Administration not to defend the several lawsuits currently making their way through the federal courts. Regardless of whether or not this particular rule ends up going into effect, transparency of fees and acting in the client’s best interest is both good business and the direction in which the advisory profession is trending.
The revelation of some of the previously opaque fee arrangements entered into by plan sponsors and providers has led to a flurry of lawsuits from disgruntled participants looking to recoup some of their losses. While many of the initial suits were aimed at plan sponsors and their advisors, in recent months recordkeepers have increasingly been added to the target list.
Among the most recent suits filed is Marshall v. Northrop Grumman Corp. which alleges that the plan paid nearly $10 million in administrative fees on top of millions of dollars in recordkeeping fees to Hewett Associates, a third-party recordkeeper, which also had an arrangement to share in fees paid to another plan provider, Financial Engines, for advice and management based on the level of assets in the plan.
Financial Engines’ revenue sharing arrangement with Voya Financial is also a factor in a lawsuit filed against Voya Financial and Nestlé’s 401(k) plan alleging that Voya was paid “excessive and unreasonable fees” for financial advice that was ultimately provided by Financial Engines.
In these and several other cases where recordkeepers have found themselves on the wrong end of litigation, it’s because the companies involved were doing more than just keeping the records. They were either industry giants with investment platforms who also have divisions that perform recordkeeping or firms that engaged in revenue sharing with plan advisors and investment product providers.
In this climate, particularly with the increased scrutiny from the Department of Labor regarding virtually everything having to do with retirement, it no longer makes sense for the firms actually involved in the process of managing retirement assets to be also providing recordkeeping services.
Many of the plan providers who also offer recordkeeping got into the business in the first place because it gave them a change to maximize the revenue available from plans with which they were already working. But in the face of increased litigation and the potential for winding up in court, a number of the larger firms are making moves to divest themselves of such operations.
Ideally recordkeeping should be a separate function handled by a third party who is neither the plan sponsor, its advisor, nor a provider of investment products to the plan. There is no reason why plan participants should pay anything other than a flat fee for administration and recordkeeping because the value of the service provided is the same regardless of the asset level in the account.
One of the big problems with retirement plans that the DOL seeks to address with its emphasis on fiduciaries is that plan participants often have no idea how much of the assets in their accounts are lost to fees every year. Having an independent, third-party firm providing the recordkeeping for a simple flat fee per account, regardless of the account balance, provides a safe separation between the plan sponsor, the advisor making investment recommendations and the providers of the investment solutions.
At the end of the day, the retirement industry needs to separate the firms who are making money from assets from those that are just a processing engine with no stake in the game. The checks and balances inherent in such a structure can ultimately greatly reduce the potential for litigation. And that’s advantageous to the plan sponsor, the advisor, and perhaps most importantly, the people all the money really belongs to—the individual plan participants.
Bob Ward is Chief Revenue Officer with Vertical Management Systems (VMS).