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

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

“Everyone wants to get the best retirement plan for the lowestpossible fee,” said Konstantin Litovsky, founder and president ofLitovsky Asset Management in Sarasota, Fla. “The big differenceamong plan sponsors is how knowledgeable they are regarding what'sgood for their plan and what's not, and how savvy they are aboutdoing their own research and what's available on the market.”

Although sponsors always have been conscious of fees, the trendhas accelerated since the U.S. Department of Labor issued its408(b)(2) regulation in 2012.

“I would guess that you could talk with any provider andthey would confirm that fee pressures have not decreasedsince the regulation was issued,” said Robert Lawton, AIF, CRPS,president of Lawton Retirement Plan Consultants in Milwaukee. “Asyou might expect, the impact of 408(b)(2) over the yearshas been to drive fees down for all 401(k)-related services. Thisis welcome news for employers; however, it has created a verycompetitive, low-margin business environment for theproviders.”

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

“While things like returns (specifically risk-adjusted returns),diversification and employee education may have more slipperydefinitions, 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) advisorsare adjusting some practices to maintain profitability. This oftenincludes a renewed commitment to superior service,

“Competing on cost alone is very difficult, so differentiationis important,” DeShurko said. “As an independent RIA and being afiduciary, offering participants specific investment advice is notan issue as it is with non-fiduciary advisors. We focus verystrongly on the employee education aspect of our service. The morecomfortable employees are with investing, the more likely they areto not just invest but invest the maximum they can into their401(k) account.”

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

• “The plan offered to our clients is the lowest possible cost,without sacrificing quality. So while we save on AUM fees byeliminating those, we don't believe in saving on important serviceproviders such as TPAs and actuaries, because their job isimportant 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, therebysaving them money vs. having this pulled out of the assets anddirectly diminishing their compounded returns.”
• “We take charge of vendor selection and oversight in manycases, because the plan sponsor does not always know what theydon't know.” “None of this is part of any fiduciarylaws/regulations,” he said, “but we believe that this is what makesus unique, because not only do we save significant money for ourclients, we also are able to provide services beyond anything thateven larger firms are capable of.”

Build on strengths

Successful advisors also are narrowing their focus from beingall 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 decidingwhat type of client they wish to work with and what market segmentthey hope to have a presence in.”

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

“That's my niche,” Lawton said. “Other advisors will probablyhave to do something similar, like specialize in dental practicegroups or industrial companies, or in a specific region of thecountry or in a plan asset size.

“Become a specialist in a market segment and work to excel inthat segment. The market can be sliced and diced into myriaddifferent segments. Look at your book and see what clients are mostprofitable and also those with whom you enjoy working. Focus yourgrowth strategies on them.”

Litovsky has reconsidered AUM fees.

“Ironically, higher AUM fees equal higher profitability,” hesaid. “This is a given. This is why nearly all firms nowadaysoperate under AUM fee structure (or a mixed flat fee plus AUM forsome mid-to-large plans) in the retirement plan arena, especiallyif 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 istotally against the current, and this happened in response toserving a specific type of clients that require this type ofapproach. Other types of plans might be just fine with the formerapproach that most other advisory firms take. I think it just comesdown to what the advisor's principles are and the types of plansthey want to serve.”

Take a look ahead

One question on the minds of advisors is whether these strategicadjustments are necessary for the long haul or whether the feependulum 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. Ithought it would have ended by now. Six years is a long time in anybusiness.:

Litovsky has a few predictions.

“I do see more and better options becoming available to plansponsors, with the most changes happening for the larger plans,though AUM fees are still the norm,” he said. “The smaller plansmarket is still quite expensive and dominated by AUM fees. Evenmost larger plans primarily are still AUM fees, though some have acombination 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 theseare AUM fees,” he said. “We are still nowhere near the price pointwhere our firm is operating, especially when considering the costof AUM fees over time, and that's for full-service provider (ERISA3(38) fiduciary, independent Third Party Administrator/Actuary, anda low-cost open architecture record-keeper).

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

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

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

“While it does limit the low-hanging fruit of plans with highfees, it does provide an opportunity to differentiate and show ourvalue,” DeShurko said. “Low-cost funds aren't always the bestperformers. Explaining the reasons for inclusion of a higher-costfund shows a level of research most plan sponsors aren't capableof. It makes it harder to complete an investment policy statementwithout the help of an outside advisor.”