Retirement Plans Favor Fee-Only Advisors, Consultants Over Broker-Dealers

By Cyril Tuohy

InsuranceNewsNet

A new study by Transamerica Retirement Solutions (TRS) finds that independent fee-only advisors and consultants gained market share at the expense of broker-dealers as the favored intermediary among retirement plans.

The finding reiterates previous indications that plan sponsors and participants care about who gives them advice, and that independence and impartiality – perceived or real – matters when it comes to retirement investments and readiness.

Advisors, consultants and third-party administrators provide research, choose investments, draw up budgets, conduct due diligence, monitor performance and communicate plan changes to employees participating in a plan.

Independent fee-based advisors and independent consultants are viewed as more impartial and often operate under fiduciary standards of advice rather than the lower – though more affordable – suitability standard.

TRS’ latest “Report on Retirement Plans — 2013: The Road to Retirement Readiness” supports the notion that retirement plan sponsors are more comfortable with independent and fee-based advisors. This is because plans see themselves as vehicles to prepare Americans for retirement.

In the next 12 months, more than two of three (68 percent) retirement plan sponsors will use or plan to hire the services of a fee-based independent advisor, a consultant or a broker-dealer, the TRS report said.

Of the plan sponsors using or hiring one of those intermediaries, a total of 31 percent said they would use or hire a fee-based or independent advisor, an increase of 4 percentage points from 2012, the study found. As many as 15 percent of plan sponsors said they would use or hire a consultant, an increase of 5 percentage points from 2012, the report also found.

But only 13 percent of plan sponsors using or hiring an advisor plan to hire a broker-dealer, a drop of 7 percentage points from 2012, the TRS study found.

A total of 23 percent of plan sponsors said that they used fee-based benefits or investment consultants for full investment discretion when researching and monitoring retirement funds, the report found. In addition, 36 percent of plan sponsors said they used benefits or investment advisors to oversee fiduciary responsibilities of limited scope, the report found.

Earlier this year, retirement plan advisors and intermediaries came under renewed scrutiny for the fees they charge and the lack of fee disclosure to retirement plan participants.

Critics point out that many fees are “disclosed” in print so small that few ever bother to read it, and for every dollar that goes into the pocket of an advisor, there is a dollar less that goes into an employee’s retirement account.

Since asset-based fees associated with the administration of a retirement plan are deducted from the accounts of participants, account holders are not sure how much they are being charged by advisors for administering the retirement program.

Critics of the retirement plan system also have pointed out that many participants are often unaware that intermediaries have a vested interest – typically financial – in recommending one investment over another.

Commission-based broker-dealers are particularly susceptible and conflicted as they have an incentive to recommend funds on which they earn a commission, critics noted. In a separate report released in October, the industry-backed Financial Industry Regulatory Authority has suggested several ways for broker-dealers to address deep-seated conflict-of-interest issues.

Despite new fee disclosure laws, “Fee disclosure regulations did not appear to have the widespread impact that had been anticipated, as sponsors reported continued lack of understanding of fees by participants,” the TRS report said.

The TRS survey also found a big increase in the percentage of plan sponsors focused on improving the retirement readiness of employees. A total of 41 percent of plan sponsors said their retirement plans were primarily focused on helping employees accumulate income for retirement, up from 35 percent in 2012.

Conversely, “retaining employees” as the primary goal was cited by 35 percent of respondents, down from 40 percent in 2012, the survey found.

As many as 62 percent of plan sponsors make retirement income education available through print material for employees nearing retirement age, 45 percent of sponsors offer information through seminars, 32 percent through retirement income counseling, and 28 percent through a referral to outside counselors and financial advisors, the survey also found.

A total of 253 people, all with responsibility for administration or retirement benefits of their employers, completed the survey. 

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].