Beware of these Heavily-Marketed Recordkeeper Products
I often have retirement plan sponsors ask me, “What is your opinion of Product X?” More often than not, it is a product that has been aggressively promoted by their retirement plan recordkeeper. Now, to be fair to retirement plan recordkeepers, with lower fees and declining margins, they are in an increasingly competitive business - so if they weren’t marketing products to plan sponsors to improve their bottom line, they might have difficulty staying in business. So, while I don’t fault recordkeepers, plan sponsors should see this for what it is - the marketing of products that may or may not have value to the plan sponsor, but certainly have value to the recordkeeper in the form of profit.
The three most heavily-promoted products that I have seen of late are:
- Managed Accounts — Unless you’ve been under a rock, you have heard about these accounts from your recordkeeper, if they offer it (and most do). I would best describe managed accounts as a target date fund on steroids, where an investment professional actually invests assets in accordance with each participant’s specific circumstances and needs. As detailed in this recent PLANSPONSOR article, managed accounts certainly have merits, but require significant participant effort can be expensive, and can be difficult to gauge whether the investment professional is adding value to the account.
- Annuities — Many 403(b) plan sponsors are familiar with this product, as they already have annuity contracts in their plans, courtesy of their insurance company recordkeepers. While some annuity investments can be obtained at a low cost, annuities have such a bad reputation for fees that they have been rebranded by marketers as “retirement income solutions” to avoid the stigma (however, in reality, the purpose of an annuity is indeed to provide an income stream in retirement, so it is not that much of a misnomer). In addition to the fee issue, annuities can be incredibly confusing as to the actual benefits provided.
- Proprietary Investment Products — An increasing number of recordkeepers are offering discounts on recordkeeper fees if you use their proprietary investment products, particularly stable value and target date funds. It should be obvious as to why - the profit margin on the proprietary product would be higher than the lost recordkeeping revenue. But proprietary products should not be dismissed out of hand, as there are proprietary products that are indeed high-quality offerings.
So how is a plan sponsor to sort through the marketing hype? They should carefully review the product with their trusted adviser, and ask themselves the following question: “Would I use this product in my plan if my recordkeeper had no relationship with it?” If the answer is no, then the answer to your recordkeeper’s marketing initiative should be “Thanks, but no thanks…”
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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