Conventional wisdom dictates that elite 401(k) plan advisors should be consolidating their clients’ often bloated rosters of record keepers. But the reality is that very few are taking aggressive action. Why?
Plan advisors often accumulate multiple record keeper relationships in the course of adding new plan sponsor clients. It is easier to keep things as they are than to rock the boat.
As a result, plan advisors sometimes find themselves managing up to 20-30 providers, which can be a nightmare, especially as demand for service from clients is rising while advisory fees are declining at an alarming rate. Even if advisors have not placed business with some record keepers for years, they must keep in touch with them to service current clients. That means spending extra time with multiple providers, putting pressure on advisors’ overworked staff or, even worse, on the advisors themselves.
Yet despite putting in extra time, the level of service advisors can expect to receive from record keepers with which they have just a few plans and have not placed any new business in years may be minimal at best. Much as “frequent fliers” get premier service from their favorite airlines, making life and travel much easier, advisors get better service from record keepers with whom they have consistent business.
Barriers to Change
Let’s drill down on some specific challenges associated with trimming providers.
First, changing a client’s record keeper takes time and money. So while advisors know that, in the long run, pruning record keepers may provide a better experience for both their clients and themselves, it may not be a pressing priority. In a fiercely competitive environment, advisors and their staffs would rather focus on current issues such as proving their value and fees.
Second, and perhaps the biggest reason that advisors may not be able to trim their roster of record keepers is client resistance. After all, plan sponsors may enjoy their relationships with their current record keepers, and their employees may be comfortable with those providers. Changing record keepers means a lot of work and extra communication with participants.
Nonetheless, in my view, it makes a great deal of sense for plan advisors to have 80% or more of their clients with three to five record keepers, and also to consider new providers. Sometimes plans may simply outgrow certain vendors. At the same time, a change may lead to more competitive fees, improved service, and expanded investment options and capabilities.
Ultimately, however, change should come not simply to reduce the number of record keepers but in an effort to improve outcomes for plan participants. While the client may get better service if the advisor has more leverage with a record keeper, that benefit may be minimal compared to the work and time involved. And many record keepers will lower fees to current clients if pushed.
So, while conventional wisdom dictates pruning record keepers, the reality is that industry consolidation (i.e., mergers and acquisitions), which seems likely to heat up again, has a greater chance of resulting in tighter provider rosters than actions by advisors themselves.
