A paradox is a statement or situation that appears self-contradictory or absurd but in reality expresses a possible truth. It often involves a conflict or tension between two seemingly opposing ideas or concepts.
Not coming from the defined contribution industry, there seemed to be so many paradoxes it was hard to keep track, while at the same time I was trying to learn and not seem stupid.
Along with taking on co-fiduciary status, RPAs built their businesses by conducting due diligence on investments and record keepers to not just save their clients’ money, which is important, but also to make sure the fit was right, that the asset managers and providers were doing a good job for the fees paid and that they had a sustainable business model.
The results have been spectacular—better funds and better record keepers, most charging very reasonable fees, which is one of many reasons why the number of providers has dropped from over 120 15 years ago to the current 40 record keepers, with consolidation going strong. Though record keepers protested at first, resisting questioning why go through this painful process if everyone is happy, and that fees could not possibly go lower, the results have been better service at a lower price with better providers, contributing to better outcomes. Well done RPA champions!
Though the role of the RPA continues to evolve beyond the Triple Fs (fees, funds and fiduciary) to be both a financial coach to participants and a quarterback to the plan sponsor, in my opinion, RPAs are the most important relationship that a plan sponsor can form and play the most vital role overseeing all aspects of a DC plan except one.
Here comes the paradoxes. Why is so much less time spent on RPA due diligence than other vendors like asset managers, who are monitored quarterly for most plans, and the record keeper with annual benchmarking and RFPs every three to five years?
The answer is obvious—the HR, benefit or financial professional who oversees the plan is not well-versed in ERISA, nor do they have practical experience evaluating fees, funds and fiduciaries. This is why the RPA is so important. But the one thing advisors cannot do is benchmark themselves or conduct unbiased advisor RFPs. Many resist, just like record keepers did in the past, claiming they can conduct benchmarking on themselves, something RPAs would never allow investment managers or record keepers to do.
Just like record keepers asked in the past, if a plan sponsor is happy, why conduct due diligence?
Not only is due diligence required for all vendors paid out of plan assets under ERISA, it just makes good business sense. At the most recent 401kCafe webinar (passcode= H&L61ZwF) with a plan sponsor who recently conducted an advisor RFP for their RPA, with whom they liked, explained why her organization decided to conduct an RFP and hire a knowledgeable third-party consultant.
They ended up retaining their advisor but did not regret the effort, which they claimed took significantly less time than when they did it themselves five years ago and validated their belief that their current advisor was doing a good job at a reasonable price while learning about new services from other advisors, avoiding conflicts with committee or board members that might be or know an advisor.
Key to the process, along with a knowledgeable consultant who recommended several advisors based on their needs is an online platform like Catapult, which not just streamlined the process but also created a documented due diligence process a plan sponsor can access if ever questioned by a committee member, board members or the DOL.
While it may not be necessary for all 806,000 DC plans, and growing, to go through a full RFP every three to five years, plans over $10 million really should, and smaller plans should deploy some process just like with their investments and record keeper. With the expected onslaught by private equity, cryptocurrency, and PEPs, plan sponsors must be more knowledgeable than ever, even if they rely on their advisor or pooled plan provider—that selection and monitoring process is and will be critical.
Granted, more plans conducting an advisor RFP will result in greater advisor consolidation, just like with record keepers, but is that a bad result?
So here’s another paradox: how can advisors who strongly recommend that DC clients conduct a rigorous and documented due diligence process on investments and providers by an independent third party recommend that the RPA be excluded if they play such a critical role? It’s like saying, “Do as I say, not as I do.”
Advisors and firms that lean into RPA RFPs conducted by an independent third-party due diligence will end up doing much better than the ones that do not, even though they may lose a few clients here and there, or their fees may be slightly reduced in some cases. Because the one question a plan sponsor should ask their RPA to determine if they need to switch is, “Should I conduct due diligence with a third party on you?”
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