Although sponsors always have been conscious of fees, the trend has accelerated since the U.S. Department of Labor issued its 408(b)(2) regulation in 2012. (Photo: Shutterstock)

Like shoppers on Black Friday, retirement plan sponsors are hunting for bargains on plan fees.

“Everyone wants to get the best retirement plan for the lowest possible fee,” said Konstantin Litovsky, founder and president of Litovsky Asset Management in Sarasota, Fla. “The big difference among plan sponsors is how knowledgeable they are regarding what's good for their plan and what's not, and how savvy they are about doing their own research and what's available on the market.”

Although sponsors always have been conscious of fees, the trend has accelerated since the U.S. Department of Labor issued its 408(b)(2) regulation in 2012.

“I would guess that you could talk with any provider and they would confirm that fee pressures have not decreased since the regulation was issued,” said Robert Lawton, AIF, CRPS, president of Lawton Retirement Plan Consultants in Milwaukee. “As you might expect, the impact of 408(b)(2) over the years has been to drive fees down for all 401(k)-related services. This is welcome news for employers; however, it has created a very competitive, low-margin business environment for the providers.”

Fees, unlike more-technical aspects of retirement plans, are simple to understand, added Bill DeShurko, managing member of FundTraderPro.com and 401 Advisor in Centerville, Ohio.

“While things like returns (specifically risk-adjusted returns), diversification and employee education may have more slippery definitions, fees are very straightforward: Lower fees, good; higher fees, bad…at least in theory,” he said.

Mid-course corrections

Much like a GPS telling a driver to recalibrate, 401(k) advisors are adjusting some practices to maintain profitability. This often includes a renewed commitment to superior service,

“Competing on cost alone is very difficult, so differentiation is important,” DeShurko said. “As an independent RIA and being a fiduciary, offering participants specific investment advice is not an issue as it is with non-fiduciary advisors. We focus very strongly on the employee education aspect of our service. The more comfortable employees are with investing, the more likely they are to not just invest but invest the maximum they can into their 401(k) account.”

Litovsky said his company goes beyond what the law requires. He works to ensure that:

• “The plan offered to our clients is the lowest possible cost, without sacrificing quality. So while we save on AUM fees by eliminating those, we don't believe in saving on important service providers such as TPAs and actuaries, because their job is important and brings significant value to the plan sponsor.”
•  ”No AUM fees, and if there is a small custodial fee, we request that this is billed directly to the plan sponsor, because that will allow them to claim a tax deduction, thereby saving them money vs. having this pulled out of the assets and directly diminishing their compounded returns.”
• “We take charge of vendor selection and oversight in many cases, because the plan sponsor does not always know what they don't know.” “None of this is part of any fiduciary laws/regulations,” he said, “but we believe that this is what makes us unique, because not only do we save significant money for our clients, we also are able to provide services beyond anything that even larger firms are capable of.”

Build on strengths

Successful advisors also are narrowing their focus from being all things to all people to building on their strengths.

“The margins in this business have become thinner,” Lawton said. “Most advisors, as a result, have to do a better job of deciding what type of client they wish to work with and what market segment they hope to have a presence in.”

Lawton Retirement Plan Consultants, for example, helps clients align their values with socially responsible investment strategies, which he said is much more difficult in retirement plans than in individual investor portfolios.

“That's my niche,” Lawton said. “Other advisors will probably have to do something similar, like specialize in dental practice groups or industrial companies, or in a specific region of the country or in a plan asset size.

“Become a specialist in a market segment and work to excel in that segment. The market can be sliced and diced into myriad different segments. Look at your book and see what clients are most profitable and also those with whom you enjoy working. Focus your growth strategies on them.”

Litovsky has reconsidered AUM fees.

“Ironically, higher AUM fees equal higher profitability,” he said. “This is a given. This is why nearly all firms nowadays operate under AUM fee structure (or a mixed flat fee plus AUM for some mid-to-large plans) in the retirement plan arena, especially if they are providing a full service to their clients.”

“Most firms are quite happy staying as a ERISA 3(21) co-fiduciary rather than take full ERISA 3(38) responsibility, which is also much easier for their bottom lines. So what we do is totally against the current, and this happened in response to serving a specific type of clients that require this type of approach. Other types of plans might be just fine with the former approach that most other advisory firms take. I think it just comes down to what the advisor's principles are and the types of plans they want to serve.”

Take a look ahead

One question on the minds of advisors is whether these strategic adjustments are necessary for the long haul or whether the fee pendulum eventually will swing back.

“I believe like all trends, this one will eventually end,” Lawton said. “When that will happen, I am not really sure. I thought it would have ended by now. Six years is a long time in any business.:

Litovsky has a few predictions.

“I do see more and better options becoming available to plan sponsors, with the most changes happening for the larger plans, though AUM fees are still the norm,” he said. “The smaller plans market is still quite expensive and dominated by AUM fees. Even most larger plans primarily are still AUM fees, though some have a combination of fixed and AUM fees.”

Few ERISA 3(38) fiduciaries offer advice tor retirement plans, he said, with most services offered by co-fiduciaries (ERISA 3(21)) having significant conflicts of interest.

“Some larger providers do offer 3(38) services, but those are 'robo' without any plan level advice, and pretty much all of these are AUM fees,” he said. “We are still nowhere near the price point where our firm is operating, especially when considering the cost of AUM fees over time, and that's for full-service provider (ERISA 3(38) fiduciary, independent Third Party Administrator/Actuary, and a low-cost open architecture record-keeper).

“You can find a low cost record-keeper that doesn't really handle complex plans for real cheap these days, but they can't offer high-end services that are often required by more sophisticated plans.”

Although it sounds counterintuitive, it may be helpful to think of today's fee-conscious environment as an opportunity as well as a challenge. “When business is going out to bid, there is always an opportunity to win it, regardless of why it is going out to bid,” Lawton said.

Advisors who set themselves apart likely will have the best shot at winning that business.

“While it does limit the low-hanging fruit of plans with high fees, it does provide an opportunity to differentiate and show our value,” DeShurko said. “Low-cost funds aren't always the best performers. Explaining the reasons for inclusion of a higher-cost fund shows a level of research most plan sponsors aren't capable of. It makes it harder to complete an investment policy statement without the help of an outside advisor.”