Twenty years ago, many retirement plan advisors built their businesses by helping 401(k) clients to reduce plan costs by forcing record-keepers through an RFP process. Saving money for participants, these RPAs argued, is not just a good thing in and of itself, but conducting due diligence on all providers, whether benchmarking or RFP, is required under ERISA.
These actions not only significantly helped plan sponsors better understand how their plans worked and were funded through revenue sharing, which was amplified in 2012 when the DOL promulgated its fee disclosure rules, it accelerated record-keeper consolidation, winnowing the roster of over 100 national providers to the current list of 42.
Though providers protested mightily asserting that their services and pricing were OK, the result was that they had to up their games and eliminate many conflicts of interest and bad practices uncovered by the process with advisors positioned as the most important vendor in the 401(k) ecosystem established.
But what’s good for the goose is good for the gander.
Why shouldn’t ERISA plan sponsors be required to conduct prudent, documented due diligence on RPAs paid out of plan assets? The dilemma is who will help plan sponsors? When record-keepers offered to benchmark themselves, RPAs scoffed because of the obvious bias, which is the same for RPAs reviewing themselves.
So while the question of whether RFPs, which should be conducted every five to seven years or when there is a big change like an acquisition, or periodic benchmarking, will actually happen is still in question, the argument of whether it should happen is not.
Plan sponsors are waking up. The pandemic and the war for talent has elevated the status of 401(k) and 403(b) plans from a tactical benefit to a strategic weapon to retain and recruit talent. Litigation and latest lawmaking like SECURE 2.0 and the recently approved ESG rule and fiduciary rules as well as state mandates have shined a bright light on our industry.
With plan sponsors realizing that the most important decision they can make is their RPA, more and more are changing highlighted by the most recent Fidelity study, which showed that 47% are actively searching for or thinking of changing their advisor.
Some advisors are willing to act as RPA search consultants, but many are using their position to belittle other advisors and eventually find a way to get themselves hired. There are independent third-party consultants, but the economics greatly favor being the RPA.
In addition, finding qualified RPAs is not easy. Plans can turn to colleagues and trusted advisors like CPAs, attorneys and benefit brokers—some of which may be conflicted, especially the latter, who may be affiliated with the RPA. Most designations say very little about the qualifications of the RPA, especially the ones where all that is required is an online exam, which proliferates in our industry.
If the RPA RFP wave does happen, who will benefit?
That answer may depend on the plan size and needs. Plans with multiple offices or a national presence may lean toward national firms. The so-called RPA aggregators (see list) have natural advantages with centralized services like CFAs, ERISA attorneys and participant services that local RPAs may not have, as well as a local presence. Firms that can realize significant revenue from participant services may be able to offer significantly lower fees for Triple F plan level services.
So just like with record-keepers, increased due diligence could cause significant RPA consolidation. Big difference, though, is the number of RPAs estimated to be around 12,000 with another 63,000 realizing 15% to 49% of their revenue from defined contribution plans. Consulting is a bigger part of an advisor’s offering than with record-keepers, especially participant wealth, and benefits services, which are harder to consolidate.
But with many providers looking to service participants, those advisors affiliated with larger firms, with leverage and able to work with participants like aggregators and some broker/dealers, will be able to either negotiate with or compete against record-keepers.
The RPA industry is graying at an alarming rate that struggles to attract younger advisors, especially with the war for talent raging. The RFP wave, which shifts the focus from relationships to quantifiable resources and pricing, could cause older advisors to retire or sell sooner.
When RPA aggregators were asked at their 2018 RPA Roundtable whether independent RPAs could survive, they answered, “Yes, but it will be harder for them to grow.”
The potential wave of RPA due diligence and RFPs will certainly not help.
