Like many other children experienced, my best friend growing up lived just a couple of doors down from me. He had a brother who was several years older than we were. And, as big brothers are wont to do, he picked on us from time to time. Nothing terrible. But one of his particular favorites seems universal in the world of older brothers: stop hitting yourself.
For those of you who magically escaped childhood without becoming familiar with this mostly benign phrase, the older brother typically takes control of the sibling’s hands and makes the hands hit their owner. As he does this, he says, “Why are you hitting yourself? Stop hitting yourself.”
As I look at the current state of the retirement plans industry, we seem to be hitting ourselves and can’t stop.
From my vantage point, covered service providers seem to be right at the center. Our industry is collectively screaming about fee compression, from advisors walking away from qualified plan business to third party administrators offshoring service to broker dealers scrounging for money to pay for compliance resources to record keepers looking for additional revenue sources.
Having sat through hundreds of annual due diligence meetings, most covered service providers strive to be below the average for cost. And absent any other point of reference, it makes sense to be on the good side of that benchmark. At some point in my career, I had a revelation. I asked an advisor, “What does it cost you to run a plan?”
Unfortunately, he didn’t know. He knew what he paid for the supporting software packages. And he knew what his hourly rate should be based on his trailing 12. But he had no idea how to account for his time working in the qualified plan space. This struck me as odd – why hadn’t a seemingly diligent advisor with a great practice thought about his business this way? Curious, I began to ask more advisors; sadly, I got the same answer over and over again. I really got worried when TPAs gave me the same answers.
Think about this for a moment as a business owner. If I make widgets, I know what my raw material costs are. I know what labor, insurance, rent, and everything else costs (or at least I should). From all of those costs, I know what I need to charge to make money on my widgets to cover expenses and still make a little something for myself. And I know how additional widgets sold can drive down certain fixed costs.
But many of us in the retirement plan space have not gone through this type of exercise on our own practices. I’m not referring to the simple calculation of gross payouts divided by hours in the work year. I mean knowing what resources you need to commit to provide adequate service to your client. Why do so few professionals know this?
This is a bit more in depth than one might guess at first blush. An analysis could include copy charges for quarterly and annual meetings. It could include an increase to professional liability insurance. It could include committed preparatory time for educational and enrollment meetings, travel costs, conducting meetings, and meeting follow ups. It could be committed to analyzing payroll contributions to ensure that match contributions follow the plan document.
In short, providers- you need to disassemble your service process completely to understand what resources you commit when taking on new clients.
But there is another benefit to this endeavor. In breaking apart servicing retirement plan clients, providers become more familiar with the process that clients buy (which may be different than the process sold). Providers gain the understanding to improve by eliminating redundancies. They have the ability to improve the client experience by identifying and tightening gaps in processes. And, most importantly, there develops a renewed enthusiasm for the model. Providers will begin to sell their services based on conviction – not price.
I had the opportunity to build a sales and service process from scratch several years ago. My firm initially met me with quite a bit of resistance: “This is the way we have always done it. And look at what we have built.” The process was disjointed at best; at worst it was a mess. We began to tear apart every element of the qualified plan sales and service process until it was as streamlined and cohesive as we could make it. Internally, no one appreciated the exercise until we walked into a case that we were not supposed to get. The case was a long shot for many reasons, but my boss encouraged me to make the pitch anyway “just to get practice.” We sold the case with a more expensive cost structure than our competition proposed. This plan sponsor bought from us because we met the needs of his client better than anyone else did. They bought our cohesive service model with conviction and metrics to measure our performance instead of the cheapest provider.
Without this type of analysis, we are going to continue hitting ourselves. We will be forced to continue to show our services in terms relative to what everyone else is charging. As covered service providers continue to pitch business based on “I can do it cheaper,” the market will weed out the high cost providers. That, in turn, brings down the average. And as we continue to fall back to the “I can do it cheaper” model, fees will continue to drop. This whole process spurs a race to the bottom. The big concern providers should all have is how the industry begins to scale businesses to deal with declining revenue. Do we cut services or employees? Do service cuts exacerbate the race to the bottom and renew a push to lower fees? And how does that help participants with retirement readiness? After all, isn’t that why the retirement plan business exists in the first place?
Alternatively, what if the entire retirement plan industry actually showed its clients how its fees break out relative to the resources and time committed? If advisers showed clients that they earn a certain rate based on committed resources and tracked how much better the plan is (participation rates, deferral rates, and other measures of retirement readiness), we can break the cycle of compressed margins. We can squelch the media hit pieces about how overpriced 401(k) plans are.
As a covered service provider in the retirement plan space and a business owner, you owe it to yourself and your clients to understand what the true costs are of servicing that client. As an industry we owe it to each other to quit selling based on cost. We should stop hitting ourselves.