As 401(k) and 403(b) plans have evolved from supplemental savings plans to holistic financial and benefits tools, so has the role of the RPA, who is arguably the most important vendor for retail plan sponsors.
The evolution of RPAs and the awakening of plan sponsors have coincided, promising not just greater benefits for plan sponsors but, most importantly, participants. RPAs emerged in the mid-to-late 1990s as a few wealth advisors and benefits brokers saw opportunities managing 401(k) plans. Fees were much higher, little was expected by uninformed plan sponsors, and liability was limited. With each recession and significant market correction, the value of sticky money in 401(k) plans and consistent streams of income become more attractive.
RPAs, especially independent wealth advisors, focused on fees, funds and fiduciary services feasting on plans managed by highly commissioned reps and insurance agents most of whom had little DC knowledge. Not only were they able to expose egregious advisor fee arrangements, but RPAs were also able to significantly lower record keeper costs through RFPs. Leveraging a growing number of third-party vendors like fi360 and RPAG, these RPAs were able to review and analyze plan investments, eventually lowering fees through index funds and, more recently, CITs. Finally, they were able and willing to act as co-fiduciaries aligning their interests properly.
Many RPAs are stuck in the Triple F business models floating along in the “sea of sameness” not keeping up with the evolution of DC plans, which not only means providing holistic financial education, guidance and advice but also integrating all benefits. Their fees have declined because the Triple Fs services have been commoditized by elegant third-party investment reporting as well as record keeper benchmarking and RFP services, while some providers like Morningstar are willing to act as co-fiduciaries for a couple of basis points.
As retail plan sponsors awaken from being consciously incompetent to consciously competent, their expectations of their RPA are growing. The 2023 Fidelity Investment plan sponsor survey, “Rising Complexity Creates Opportunity for Greater Advisor Impact,” shows a disconnect between plans and advisors. The plan sponsors want an unbiased and trusted advisor who saves them time and helps their employees while advisors think their fees, funds and wide array of services are most valued. The proverbial, “when the only tool you have is a hammer, the whole world looks like a nail.”
So while it might be may be impossible or at least impractical to rate the 12,000 RPA specialists and 60,000+ dabblers like the 20-25 top record keepers, there is a simple method for plans to rate and review their RPA called the “ELI Rating” along with required due diligence.
The “E” stands for ethics which is pass/fail through FINRA and SEC databases along with simple Google searches.
Leadership or the “L” represents whether an advisor is proactive calling for committee meetings and taking notes, conducting employee surveys and suggesting new tools and services like managed accounts and retirement income.
Finally, “I” is for impact – do the suggestions and actions have a positive impact on the three parties to a DC plan, which include:
- Participants and eligible workers
- In-house administrators
- The company or sponsoring organization
Like with record keepers and investments, documented due diligence by a prudent and unbiased expert of a plan’s advisor is required, whether for a benchmark, RFI or RFP. It’s not just good business practice; it is required if the advisor is paid out of plan assets. As plans wake up, expectations grow, though many do not even know what to ask for.
During a recent advisor RFP conducted by TPSU, the plan sponsor indicated that they were very satisfied with their incumbent who met with the committee and participants periodically. That advisor did not even make the finals. Another plan sponsor about to conduct an RFP asked whether their advisor should oversee their record keeper and TPA because their incumbent is only willing to review the plan’s investments.
As advisor fees decline and plan sponsor expectations increase as do costs, especially for labor and technology, RPAs look to participant services which is natural and needed. However, some may be tempted to recommend proprietary or third-party services for which they are paid additional fees or commissions rather than be compensated for evaluating and monitoring them as they do with plan investments.
And while being paid extra to be a 3(38) fiduciary may be justified in some cases whether for managed accounts or retirement income, it opens the door for other advisors to question whether the services are worth the cost and whether there is a conflict, just as many well-heeled RPAs did when they replaced non-specialists decades ago.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.