Recordkeeper Consolidation Would Not Mean Falling Skies

A recent article appearing in the retirement industry press made a bold, but not necessarily accurate, statement about the consolidation of qualified plan recordkeepers and the services they provide.  First, the assertion that “rising technology costs, lower fees and increased intellectual capital needed to remain competitive” will lead to consolidation, and will reduce the total number of retirement plan recordkeeping service providers.  That much may very well prove to be true.  The bold statement came next, claiming that this consolidation “will result in higher fees and worse service.”

Beyond the obvious question of how the competitive need for lower fees and increased services will eventually result in higher fees for less services – those two contrary claims were made in consecutive sentences – there are other reasons to question the article’s pessimistic prediction.  Technology, and the costs associated with it, have certainly come to recordkeeping.  Investing retirement plan assets has become extremely sophisticated in a mostly daily-valuation environment, and the overall volume of transactions and plan-to-participant interactions has grown exponentially.  The idea that these things can be done efficiently and cost-effectively by manual means, or with simplistic technologies, is no more valid than believing that the evening news should be shot on film, rather than digitally.   Better technology has its price.

But in many, many cases where advancing technology has been applied, we can point to greater capability and lower prices, not less service and greater expense.  Smart phones, computers, robotic manufacturing, even the early assembly line process dating back to the time of Henry Ford, are examples of the quality and cost benefits of applying new technologies to a product or service. 

Another implication of the article is that the only way providing recordkeeping services can be profitable is if the provider has another product to sell, such as – for example – proprietary investments.  Believe it or not, there are recordkeepers in the marketplace who run profitable businesses without cross-selling anything, just as there are fee-for-service investment advisors who make a living without being compensated in other ways.  Neither model is wrong.  But I believe it’s inaccurate to state or imply that only by selling another product or service can recordkeepers serve the industry well, or remain in business.

From my observations, consolidation within the recordkeeping industry should not be seen as a sky-is-falling development.  Conscientious recordkeepers will continue their commitment to offering the best product they can, at a price that generates a reasonable profit, but is also fair to plans and their participants.  If they do less, someone will see the obvious opportunity and take their business. This dynamic will continue to govern the recordkeeping industry, as it has, whether the quality recordkeeper has many industry peers, or few.

EBSA May Be Listening After All … We Hope

Many seasoned industry professionals will remember an iconic TV commercial of some three decades ago, produced for the E.F. Hutton brokerage firm.  In this ad, when the broker shared his insights, the world around him came to a frozen-in-time standstill, in order to hear what he had to say.  The theme was: “When E.F. Hutton talks, people listen!” 

I don’t want to suggest that when representatives of the Department of Labor speak, the world comes to a complete halt and gives them undivided attention.  But when the subject is one which is as controversial as proposed regulations on a definition of “fiduciary” for retirement arrangements, the effect is similar.  Assistant Secretary of Labor Phyllis Borzi, of DOL’s Employee Benefits Security Administration (EBSA), had a captive audience when she spoke on this subject at the International Foundation of Employee Benefit Plans’ Washington Legislative Update in early May. 

In her comments, Ms. Borzi seemed to show a mixture of accommodation with a hint of impatience.  She acknowledged that her agency has slowed the pace of completing new proposed regulations to define “who” and “under what circumstances” an advisor or investment representative should be considered a fiduciary with respect to retirement assets.  Promised August issuance of these proposed regulations appears now to have been reset, in order to – we are told – obtain more input from the industry and interested parties.  In fact subsequent to this May presentation, the agency’s updated Semiannual Agenda of Regulations now lists a target date of January 1, 2015.  At the same time, however, Ms. Borzi was quoted as saying that “We’re not going to wait forever.”  It is apparent this is a high priority for Ms. Borzi and one she intends to see come to pass as quickly as possible. 

It is not entirely clear whose hand is actually on the throttle with respect to these new regulations.  Ms. Borzi has been EBSA’s “point man,” champion, and spokesperson for them since an earlier version was released in 2010, then withdrawn in 2011.  Yet she indicated in her recent comments that new DOL Secretary Thomas Perez would give the order on when to issue the new proposed regulations.  Adding more uncertainty is the fact that this is a mid-term election year, when control of the Senate and House of Representatives – really the national balance of political power – is up for grabs.  In a foretaste of the political season to come, already we see legislation being introduced in Congress that appears to be primarily intended to expose the opposing party to negative publicity, and provide campaign advertising fodder in the fall campaigns.  If the party now in the White House comes to view the proposed fiduciary definition regulations as a potential political liability, we can be almost certain that they will languish until after the November elections.  The  release of the regulatory agenda seems to indicate that is exactly what has happened.

Many in the industry fear that if EBSA overreaches in its new proposed regulations, advisors who are concerned about a level of responsibility out of proportion to their roles – and potential litigation – will be unwilling to advise and consult.  It is feared that if this happens, retirement savers – particularly IRA savers – may find themselves underserved or abandoned when it comes to badly needed investment guidance.  We do not doubt Ms. Borzi’s sincerity or good intentions.  Many simply disagree on the point where agency oversight and regulatory action and investor hand-holding could tip the balance from helpful to harmful, and leave retirement savers the losers in the bargain.  Taking the time to balance all the facts and to get this right seems to be the prudent course of action.