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Kmak: Stop the Race to the Bottom on Fees

There are plenty of financial pressures on DC plans, providers and sponsors. Not to mention the importance clients place on fees when considering whether to drop an investment manager. In a June 20 session at the 2016 SPARK National Conference held in Washington, D.C., Tom Kmak, CEO of Fiduciary Benchmarks, offered some ideas on how it can be addressed. 

The financial pressures include: 

  • declining revenue;
  • increasing wages;
  • inflation;
  • regulatory requirements; and  
  • technological advances.
One result of these factors: industry consolidation, which Kmak said “will continue to happen.” But clients don’t recognize, or are not aware, of these pressures. They are aware, however, of fees — which Kmak noted have been identified as “the number one reason for dropping an investment manager.” 

Fees have also figured in ERISA lawsuits, he said, noting that the key themes in those cases were: 

  • lower fees in the future;
  • independent consultants benchmarking plans;
  • RFP/competitive bid requirements;
  • no more than reasonable compensation; and
  • the addition of a brokerage window. 

When addressing the reasonableness of fees, Kmak said, there are three major points to keep in mind:

  • “reasonable” does not necessarily mean “low”;
  • fees are not considered in a vacuum; and
  • fees are decided at the service provider level.
Fees are not the most important consideration, Kmak argued: quality, service and value are critical as well. “Having four variables saves plan sponsors money,” said Kmak. “Don’t make this a one variable equation.” Kmak suggested starting with a base fee and adjusting for fiduciary responsibility, as well as extra communication and meetings that may be necessary. 

“It takes courage to go to a client and tell them it’s not just about fees,” Kmak said. 

Then there’s the impact of the DOL’s fiduciary rule. “There’s a new game in town for the advisor community,” says Kmak, who argued that the fiduciary rule “will have a profound impact” on record keepers, and “for the good.” The rule “is going to help you,” he said, “because an advisor is worried about being in a race to the bottom.”