Take Your Pick

As investment advisors increasingly play a larger role in the distribution of retirement plans, retirement plan providers and the companies that partner with advisors to sell and service retirement plans are courting advisors like never before with new products and services.

Take Fidelity Investments. Sales of 401(k) plans through Fidelity-affiliated advisors have jumped 38% so far this year over 2004, mainly because Fidelity is now offering advisors a platform that includes proprietary and non-proprietary funds, says Dave Librock, executive VP and head of Fidelity’s retirement business. Fidelity now offers advisors 230 outside funds from more than 31 different fund families. “We have an open architecture platform,” boasts Librock, “and a much more integrated product offering.” Fidelity’s platform is built around trustee, administration, recordkeeping, and communication services, Librock says.

Another Boston firm–MFS Retirement Services Inc.–is also betting that an open-architecture platform will attract more business from advisors. But MFS is going even further by equalizing their commissions on sales of proprietary and non-proprietary funds. Marty Beaulieu, director of global distribution at MFS, says that until a couple of years ago, single-family fund companies could compete, but today, “the marketplace is saying we want multiple fund choice, better transparency and disclosure, and we want to understand how our advisors are getting paid.” Beaulieu says that by offering equalized commissions, MFS is better able to “communicate” an advisor’s compensation. Due to increased scrutiny from regulators on fee disclosure, “fund companies like us have pushed hard on the transparency and disclosure” of various fees on retail funds as well as those offered in retirement plans, he says.

Beaulieu says that MFS’s good service reputation has aided its fortunes, as has its sales force. “That consistency in distribution has helped us,” he says, but MFS’s weakness was the fact that “we really didn’t have a product offering that plan sponsors in our marketplace were excited about.” The combination of an open-architecture platform, the new commission structure, and the fact that MFS has “simplified the pricing mechanism around administrative fees,” he says, should be a winning combination.

MFS’s parent company, Canadian-based SunLife Financial, is using its deep pockets and know-how to help MFS expand its retirement business. “SunLife has the No. 1 market share position in Canada–about 45% of DC/401(k) type products,” says Beaulieu, who points out that SunLife’s CEO, a former pension actuary, believes that if MFS “expands [its] products and distribution, and repositions the retirement company as more of an open architecture, we should be able to grow the business.” MFS Retirement Services now has more than $14 billion in retirement assets under recordkeeping management, and does business with 6,800 retirement plan sponsors that have 1 million participants.

Equal Commissions Good?

Librock of Fidelity has his doubts about whether providing equalized commissions is necessary. “If you think you need [to offer level] compensation because you believe there is a conflict of interest, then you’re also acting as a fiduciary–giving advice,” he says. “If you’re giving advice, you can’t be receiving a 12b-1 fee.” He says Fidelity has created I-share class funds in both Fidelity funds and non-proprietary funds–that have no 12b-1 fees. “The advisor can negotiate the compensation directly with the plan sponsor,” he says, and “the fees will show up on the participant’s statement.” To Librock, offering an I-share class is a “cleaner way” to go than equal compensation because “if you aren’t giving advice and giving guidance, there are no conflicts as long as you have disclosed what your compensation is and what you’re receiving in compensation.”

Monica Kirgan, VP of individual investor business at the Principal Financial Group, says offering an open-architecture platform is definitely a hot trend. “Employers have moved more away from their primary decision-making on retirement plans in choosing the investment lineup,” she says. “We’re seeing more of an open-architecture investment platform being offered.” But a broader choice of investment options means that participants, employers, and intermediaries are looking for guidance in choosing the best investment, she says. This is providing a great opportunity for advisors and firms like Principal to step in and “assist employers at the worksite to help employees understand their choices.”