The Business of Being in the 401(k) Business: Path Forward For Independence?
President & CEO Northwest Plan Services
Tim Wulfekuhle is President and CEO of Northwest Plan Services, Inc. (NWPS), which is a non-producing retirement plan recordkeeping and administration firm headquartered in Seattle. NWPS provides services to all sizes of clients, from start-ups to Fortune 100 companies. He has over 30 years of retirement plan recordkeeping, administration and consulting experience and has been an owner of NWPS since 2002. Prior to joining NWPS, Tim was the Director of Retirement Plan Administration Services for Howard Johnson & Company. Throughout his career he has specialized in large, complex defined contribution relationships and has been the lead consultant for numerous national clients.
Tim holds a Bachelor’s in Mathematics from Washington State University.
NEW: Episode Transcript
Rick Unser: Well, Tim, welcome to the podcast. I am really excited to have you here and excited to hear what you have to say about the business of being in the independent recordkeeping business. So thanks for taking some time.
Tim Wulfekuhle: Well, thanks for having me this morning. We're really excited to participate in this and we're looking forward to the conversation.
Rick Unser: Awesome. I have to be honest, one thing I tend to do to try to help employers kind of get their arms around recordkeepers and the different types of recordkeepers out there, is I tend to put them in buckets or categories. I don't know if you do the same or if you've given any thought to that, but as you look out over the broader spectrum of firms out there that are in the 401k or workplace retirement plan recordkeeping business, are there different categories that you think of them in or different ways that you might group them that might be helpful for others to understand what's out there and how you guys maybe compare or contrast?
Tim Wulfekuhle: Our first cut line would be bundled versus unbundled. Of course, kind of your classic: are you involved in the investment product as well as the recordkeeping or aren't you? Then, I kind of look at ourselves as national versus regional when you're looking at the unbundled. So two little ... two classifications as we see it.
Rick Unser: Got it. And, again, as you're kind of thinking about others in the recordkeeping community, do you give any credence to or do you see any dividing line between, "Hey, we're aligned with an insurance company"; "Hey, we're aligned with a bank"; "We're aligned with an investment firm"; or, "We are truly independent and have no other ties or allegiance to anything other than a recordkeeping group"?
Tim Wulfekuhle: I think most people that think of themselves as independent recordkeepers would say the people aligned with an insurance company or a bank or a financial services firm don't really fit in that category. Independent is pretty much focused on recordkeeping and administration, none of the ancillary products that go along with the defined contribution plan.
Rick Unser: And is that really the dividing line there? To be an independent recordkeeper, what is that litmus test? What is that kind of stress test to be able to say, "Are you really independent?" And is it, "Hey, we're open architecture"; or, "Hey, we truly are a standalone business"?
Tim Wulfekuhle: And independent recordkeeper truly is a standalone business. What are you selling? Where are you making your money? If it's recordkeeping administration primarily, I'd say that's independent. If it's products, whatever shape or form that may be, or if your endgame is owning the participant somehow down the line, I don't think of that as independent.
Rick Unser: I'm glad you kind of brought that up, because I think that's something that is, on the surface, maybe, "Wow, yeah, hey, that's kind of obvious." But then, I think as you get into some conversations, I think that kind of gets lost in the shuffle sometimes, where it's like, "Okay, yes, we do recordkeeping, but we're doing recordkeeping because we're in the business of moving product through our recordkeeping channel"; or, as you said, "We're doing recordkeeping because in the end we really want to own that participant conversation when it comes time to roll over, or if they have excess assets or other individual retail needs to manage money or wealth or whatever it might be."
Rick Unser: So, I guess, let me get to a question here. I mean, do you see that as a bad thing? Or do you see that as just, "Well, hey, it's just a different business model"?
Tim Wulfekuhle: It's a different business model. I wouldn't say it's necessarily bad in all cases. I think in some cases, certainly, we've seen examples of different firms rolling money out of their own bundled product into their own IRA where, ostensibly, you have more choices, but basically you end up in the same target date fund at a higher share class. I don't think that's good at all. But it's hard to kind of get sponsors to unwind that or even care post-termination.
Tim Wulfekuhle: But if you do care, then there's a role for the independents. And that's what it really gets down to, is, "How much do you care if your ... who owns the participant?"
Rick Unser: And I guess let me give you an opportunity for more of a philosophical question here. I mean, hey, employers these days, there's a lot on their plates, and 401k sometimes can get kicked down the road a little bit or be the level of scrutiny or philosophical conversations that happen, don't always kind of elevate to the level that maybe we would want them to. But why would it make sense for an employer to think about what you just said, which is, "Who do you want to be talking to your participants or who do you want to kind of own that participant conversation?"
Tim Wulfekuhle: Yeah, like a lot of things: it depends. It depends on an employer's philosophical thoughts on where they care about their employees in the lifespan of that employee. Is it just while they're working there? Or do they actually feel there's a role for them post-employment?
Tim Wulfekuhle: And I don't think there's a right or wrong answer to that. It's just kind of employer by employer, you know, how paternalistic, for lack of a better word, you want to be with those people. And we're really talking about the post-termination. But we have ... we've seen sponsors that it matters greatly to them what happens after that, and others that once they're gone they don't care.
Rick Unser: As you've had conversations with sponsors over the years, for those that matter greatly is there anything you can point to that people have said where it's like, "Hey, this is why we feel strongly one way or the other"? Then, I think on the flip side, I think I understand the conversation of, "Well, we don't really care." I get that side of it. But for those that are really passionate one way or the other or have an opinion one way or the other, is there anything that's kind of guiding that in your opinion?
Tim Wulfekuhle: It's just the view of, you know, these people gave us a good chunk of their working life and we don't want them broke. We don't want them out there telling people that, "I worked for 30 years for this company and I can't live on my retirement income." Some of it's PR and some of it's just deep caring by the people that are in the HR or the finance department. And some people just want to see their participants always getting the best deal, what's best for them, not their providers.
Rick Unser: And I guess coming back to your position as a leader of an independent recordkeeper, is an independent recordkeeper in your opinion better positioned to provide a better outcome? Or is it more just that you have more flexibility and choice as to what those outcomes or the ownership or the conversations that are had at the participant level, how those happen and who those happen with?
Tim Wulfekuhle: Well, I think an independent recordkeeper can ensure you don't get a worse outcome. That might not be the bar for everybody, but in some cases maybe a rollover makes sense for someone, depending on the plan they're in. Certainly, smaller plans cost more at the participant level in recordkeeping than the larger ones do, and the IRAs cost about the same for the same balance. So there's times where it probably makes sense for a rollover for a person, using that as kind of the product example. But a lot of times it doesn't, and as an independent you don't have any skin in that game, in that decision. So I think you can make sure the outcome's the best or the same, not the worst.
Rick Unser: One thing, and please correct me if I'm wrong, but as I think about, to your point, a true independent recordkeeper, somebody that there's no ties to other product or other sort of sales vehicles for the employer, for participants, whatever it might be, I tend to think of independent recordkeepers as a little smaller, a little more boutique. Is that a good thought process on my end or am I missing the boat there on what's going on on the independent side?
Tim Wulfekuhle: I think you're missing a segment of the independent side. You categorized the bulk of independent recordkeepers correctly I'd say: smaller boutique, regionally-oriented if not even micro-regionally-oriented. But there are some decent-sized independent recordkeepers who have a national footprint that, while maintaining some of the boutique-ness of a smaller recordkeeper, still can compete at the largest levels anywhere in the nation.
Rick Unser: That makes a ton of sense. And what I hear from a lot of recordkeepers out there, especially some of the brand name or big box providers, you don't have to get into a conversation with them very long until they start talking about scale and participant count and plan count. One of the mantras that I've heard over the years is: to survive in the recordkeeping or to be viable in the recordkeeping space you have to have scale. So as you think about that as a leader in the independent recordkeeping space, how do you guys think about that scale conversation? And is that an important measuring stick as you're looking at the strength or viability of a recordkeeping partner?
Tim Wulfekuhle: Scale is important and it's going to continue to be important in almost every case. You have to be able to spread your fixed costs across a larger revenue base, a larger client base. There's just certain things from a ... data security to participant experience, those issues that require constant investment. It's certainly a lot easier to keep your costs down if you can spread that across a larger base.
Tim Wulfekuhle: I think there's always going to be a role though for some of the smaller ones to stay in. I'd most liken it to the car market. BMW is never going to sell as many cars as Honda, but they're going to sell plenty of cars. Right?
Rick Unser: Yeah. And I guess on that note, if you're thinking about the car analogy for example, I guess from an independent recordkeeping aspect, like you said, if you're not competing on scale, if you're not competing on, "Hey, we're the biggest, we're the best, we've got the most participants and that gives us the following advantages," et cetera, if that's not going to be your competitive position in the market, how are you seeing independent recordkeepers, whether it's kind of micro or regional or even national ones, what's really the value or what's really kind of the positioning that they're taking that's saying, "Hey, here's why it makes sense and here's how that helps us continue to be viable in a very challenging and difficult market right now"?
Tim Wulfekuhle: How about I clarify the scale issue a little bit? You need scale to a point. I don't believe it's all about scale. If you look at the top-ranked recordkeepers by assets or participants or anything like that, there's only, like, 10 or so that have really true scale, and it drops off pretty fast after that. But there's way more than 10 that I think are viable. So I think once you get to a critical mass where you can support your infrastructure and continue to invest in it, I think scale becomes less of an issue.
Tim Wulfekuhle: But from an independent side, we position ourselves a little differently in that we're not here ... again, we're not putting you in a box. You've got to be able to provide some niche type of service that matters to someone. And if it doesn't matter, I'd say get in the box. They're usually not bad boxes, you know?
Rick Unser: Everybody else is doing it, right?
Tim Wulfekuhle: Yeah. I mean, they might be a steel-sided box. They might have cloth-sided with a little more flexibility to them. But it's a box. It works. In a lot of cases it works just fine.
Rick Unser: And you mentioned a word that I'd love for you maybe just to dig in on a little bit, which is "viability." As you think about the independent recordkeeping model, what do you think it takes for an independent recordkeeper to be viable, whether it be today or three years, five years down the road? Is that like you said a minute ago just kind of a niche offering? Or is there more to it to really be considered a viable business and a viable enterprise today and in the future?
Tim Wulfekuhle: I think down the road you're going to have to have at least some name recognition in whatever market you happen to be competing in, and viability is going to be based on whether you can tell them you've got ... maybe it's 1,000 plans, maybe it's a few hundred thousand participants, but something that says, "We're in this and we're staying in this." You might have to show them you're doing acquisitions, not being acquired.
Rick Unser: And that's something we're seeing a lot of in pretty much all aspects of the retirement market; certainly recordkeepers we're seeing continued M&A activity, investment managers, advisors, third-party administrators. I mean, it seems like the consolidation bug has hit the retirement industry. Is that something that is going on as well in the independent recordkeeping space, or not so much?
Tim Wulfekuhle: Absolutely happening in the independent space. I predict it's going to continue to accelerate, really, for the next 5 or 10 years, and then it might likely drop off, because there won't be a lot of them to acquire. A lot of these businesses started in the 80s and 90s when no one had 401k plans. So I go to any industry event, and I'm 56 years old, and I'm a young guy in that room. It makes sense.
Rick Unser: It's all a matter of perspective, right?
Tim Wulfekuhle: Yeah. It makes sense why a lot of these are getting acquired. People are looking for their out, which you can't blame them.
Rick Unser: And as you think of what's ... you know, M&A in the independent recordkeeping space, are those independent recordkeepers buying each other? Or are you seeing independent recordkeepers sort of cross-pollinating with other buyers, whether ... maybe it's an investment manager buying a recordkeeper, or it's a advisory firm buying a recordkeeper, or whatever the case may be?
Tim Wulfekuhle: I think you're seeing both. But I think primarily it's independent to independent, often private equity backed, as private equity firms try to expand their scale across the platform that they're investing in. It's a good business for a lot of private equity firms, because most independents are pretty cashflow-predictable, pretty profit-predictable, and you can figure out how much leverage you could put on it, make that loan payment pretty easily; you don't have inventory or widget sales or anything like that. It's like the bond portfolio of their fund.
Rick Unser: And that's, yeah, I guess another theme that we're seeing pretty prevalent regardless of industry. I was having this conversation with somebody yesterday, just ... it seems like at this point most everybody's owned by private equity in some way, shape or form.
Tim Wulfekuhle: Yeah, I would agree. Who wants to be a public company these days? I wouldn't. And we're, you know, full disclosure, we're private ... we're majority held by private equity, twice now.
Rick Unser: Which, again, not a good or bad thing, just an observation.
Tim Wulfekuhle: Yeah, it's been a good thing. It helped me retire my former business partner when he was ready to go without having to lose day-to-day control of the company.
Rick Unser: You mentioned a minute ago, back on the scale conversation, around investments in technology, participant resources, et cetera. I guess as I think of some of the recordkeeping pitches that I've heard over the years, some of them are very focused on widgets, apps, websites, fancy stuff, the bright shiny objects as I would say, that either employers or participants get focused on. Correct me if I'm wrong, but my perception is that some of the big box providers are going to outspend what a lot of independents are going to do 5X, 10X, et cetera. How do you think about investments or how do you think about your business and making investments in those areas to keep you viable, competitive, et cetera?
Tim Wulfekuhle: That's a very good point. It's a base level of functionality you're going to have to have or continue to have to be viable when you're making your pitch or just staying engaged with your current clients. Frankly, independents are probably more followers than leaders in most cases in that. We respond to what new blinking light is being shown by the bundle shops. And I don't think that's good or bad. But, unfortunately, 5% of the participant population is driving 95% of the demand on what we have to do. The other 95% of the population, 70% of them didn't log on last year, at least across our client base. So where we're spending our money and who's really getting the advantage of it. But when you're in the HR department ... and that's where those 5% of them end up: chipping away at the HR person for not having this or that. You've got to be able to continue to invest in that.
Tim Wulfekuhle: And it's really the participant experience that seems to be driving that innovation. The back end, nobody cares about recordkeeping until it's wrong.
Rick Unser: That's a good point. And one of the things that I've heard just kind of mentioned in casual conversation is, "Hey, recordkeeping is becoming a commodity." And I'd just be curious to get your opinion on that. Is that something that is just kind of a reality: that that's where recordkeeping is or is headed? Or is that a misinformed or misguided oversimplified statement?
Tim Wulfekuhle: It's a little oversimplified, but certainly in a lot of plan design standpoints recordkeeping can be a commodity. And if you don't care about who owns the participate ultimately, the recordkeeping on a straight up safe harbor plan, you know, immediate eligibility, nothing funky going on, yeah, it's pretty commodity-based. If you're viable in this industry, you better be able to do that plan and do it pretty cheaply. But there's a lot of them that are a little more complicated than that, when I don't think it is a commodity. I think it is something that requires exact execution. I think only payroll is worse than recordkeeping as far as having to be right. We've got a day to catch it. You know? Paychecks don't. But it's got to be right all the time. It can be a tough business on employees, too, because it's pass/fail, and pass is 100%. You can't be 1% wrong.
Rick Unser: And one of the things that I tell a lot of employers is I think a lot of people are most concerned about the "headline risk" of being the target of the next 401k or ERISA class action lawsuit. I think that's what keeps some people up at night, is, "Oh my gosh. Are we going to make some decision in our retirement plan that we're going to get sued"? Where as I think for the majority of employers the bigger exposure or the bigger risk is something is going to break within their plan and that's going to lead to a very expensive, potentially, fix through the DOL, the IRS or some other means that they're going to have to take care of. And, unfortunately, some of those mistakes are recordkeeping-driven.
Rick Unser: So I'm with you. I think there's certain aspects that, yeah, hey, you've got to be able to do it cheap and well and fast, et cetera. But I agree: there's other plans where, man, you really want to make sure that, if you've got this particular plan design, that you're dealing with somebody who knows what they're doing.
Tim Wulfekuhle: I think it's a really good observation. It's correct: no one wants to be named in the next lawsuit on every industry ... every industry publication is going to pick it up. No one wants that. But as a plan-by-plan basis, you've got a lot more risk in that you're just going to have something go wrong that's going to cost you some money; cost somebody some money. Then, you've got to figure out who. I mean, it's a lot of times buried in the contract with what ... You should know what your exposure is, what your provider's going to cover, and if it's limited by some ... X times fees or something like that, because if you're a $1 billion plan sponsor, X times fees is going to get run out pretty fast if you have a real mistake.
Rick Unser: That's a good point. And in terms of taking responsibility, I think everybody's kind of clued into the whole fiduciary conversation these days. I know more recordkeepers are starting to step into the, "Hey, we'll take some responsibility for your plan administration," and, "Hey, we know you don't do this on a day-to-day basis or you might not have the expertise internally, so we'll sign onto your plan as a fiduciary for administration." Talk to me a little bit about that. Is that something that you're seeing independent recordkeepers maybe run towards and maybe not as much from some of the bigger-box providers out there?
Tim Wulfekuhle: I think on both big box and independent some are running towards it, from what we've seen anyway; and some are offering it as a concession if somebody really wants it; and a lot just won't touch it. I think your recordkeeper should always have in mind that the person on the other side probably doesn't do a lot of these, and take responsibility for those aspects that you know you need to do. You don't expect somebody to tell you what notice you should be preparing for them or the fact that you need to send out a summary annual report or something like that, although their fiduciary duties, I think they fall on the recordkeepers camp already. And to take on 3(16) duty takes a little more risk, but usually your recordkeepers been doing all that already. If you can get them to do it, you don't have to pay 3(16) for it.
Rick Unser: And that's kind of a buzzword right now: 3(16). Can you maybe just define that real quickly? And as you're kind of doing that, are there different levels of support or 3(16) engagement that recordkeepers can provide?
Tim Wulfekuhle: Yeah, I think ... 3(16), you know, it's a plan administrator fiduciary, [inaudible 00:22:50] administrative fiduciary and you're responsible for making sure that all notices are prepared and sent out, the quarterly statements are done, kind of all the compliance testing, all those administrative tasks that usually we think falls on the TPA or recordkeeper anyway. It's just whether you're going to be the person that signs the 5500, or some 3(16) services take you up to signing the 5500, but the sponsor still has to do that, so they carve out a subset of the duties versus taking them all on.
Tim Wulfekuhle: Does it make sense? In our view, generally not, since you could normally get your recordkeeper to do all that stuff
under their standard fees and not have to pay extra for 3(16), and you're still on the hook for picking and monitoring the 3(16) anyway. But there's peace of mind for some sponsors, and we understand it and we offer it.
Rick Unser: What you just said there I think is important, because I've seen some things over the years where you can outsource your fiduciary responsibility on plain administration, and ... Let's call it partially true. But I think that's a really important thing that you brought up there, which is: if you are going to partner with someone who can do that, you still are in the loop. You still have to oversee their actions. And that's another tricky conversation of, "Okay, well, if we're not doing it how are we overseeing this?" And I think that's something that always comes as a little bit of a surprise to some employers where it's like, "Well, hey, we've hired these people, but if something goes wrong or if you get sued, there's likely still some exposure for you in there. You might have somebody that's got to defend themselves alongside you, but you're still going to be named, you're still going to have to defend yourself, et cetera."
Tim Wulfekuhle: Yeah, we say a lot of times, and particularly when they're pitching co-fiduciary services and that, it's like, "Well, they're going to jail with you, not instead. How much are you going to pay for company?"
Rick Unser: That's funny. I haven't heard that one. That's a good one. I might have to steal that.
Tim Wulfekuhle: You can have that.
Rick Unser: What else is going on out there that you're seeing in the recordkeeping space that is either something that you're excited about as an independent recordkeeper, or something that you see as a development or threat that you guys are trying to work through?
Tim Wulfekuhle: I think you see it on both sides; certainly on the development side. We talked about headline risk and nobody likes to be sued. But we've found most of these lawsuits have been good for if you care about the participants. These lawsuits have driven down pricing. They've driven up full disclosure of fees. They've really been instrumental in that. And the industry wasn't going to do that on its own as a whole, to be honest about it. They peeled back revenue sharing. How many people were allocating revenue sharing back to participants 10 years ago? Darn few. Now, it's all out in the open. I think it's been good. Several people I'm sure would disagree with me on that, but I'm one that doesn't mind seeing Jerry Schlichter's name. It's getting a little ridiculous now, some of this is. But the early ones, you'd look at it and say, "Yeah, it makes sense."
Rick Unser: And I'd just be curious to get your opinion on this, because I think what we have seen over the years and ... I had a prior conversation with Dick Darian on kind of a similar type of podcast where we were talking about kind of the business of being in the 401k business. One of the things that he was noticing and is kind of predicting that will continue to happen is some of this conflation of investment managers and recordkeeping, or advisors and investment managers, or more lines being blurred or even kind of knocked down between some of the different types of providers that are out there.
Rick Unser: What you brought up about the lawsuits kind of struck that memory in my head. But do you see that as a trend that continues? Or, in light of some of the things that we're seeing with the SEC's Reg BI, maybe the DOL coming in and taking another bite at the fiduciary rule? Are some of those things maybe advantageous for the independent recordkeeping model?
Tim Wulfekuhle: I don't think there's any question that the fiduciary rule, if it's close to the former, the one they pulled back, would be advantageous to the independent recordkeepers, at least most of them. Certainly, from a conflicted stance; based on where we are we love the old fiduciary rule. I couldn't say what impact did it have. It didn't have any impact. But I think fiduciary rules would be a great thing for independent recordkeepers. And I think you will see this [inaudible 00:27:30] continue, particularly near the top. The lines are going to get blurred among the top big box shops, is really what's the difference, other than price.
Rick Unser: And I guess maybe expand upon that a little bit if you don't mind. I mean, when you look at the prior DOL rule and maybe what might be coming, obviously that's a little speculation, or if you look at what's going on with the SEC's Reg BI, drill into that for me a little bit in terms of why you think that an independent recordkeeper could benefit from what's out there or what might be coming and some of the others that have various lines of business might struggle a little bit or could struggle mightily, depending upon how some things play out.
Tim Wulfekuhle: Well, just going back to the example of the post-termination rollover, if you've got a best interest standard for that participant, you're not going to be able to roll them from the R6 class to an A share or something like that into those same funds. So if you're counting on your IRA business to really prop up the recordkeeping that you're just doing at cost or even loss, you wouldn't be able to do that anymore, which is going to cause you to have to raise the prices on the recordkeeping, which will maybe not be good for the participants. It's good for the independent recordkeeper who's not going to be impacted by that.
Rick Unser: Can you drill down on that a little? Because I think that's something that is a little harder for employers to understand, and even I think some of the industry have a hard time kind of saying, "Okay, well, here's how much the recordkeeping business is being subsidized or other ... " I'm not sure what the right word is, but, "by that individual retirement business or the rollover business." Are there numbers that you guys think about or that you're aware of if you're saying, "Hey, well, we know that other business models are getting X basis points or X dollars they're able to sort of put into the pot when they're thinking about pricing their recordkeeping services that as an independent we're not, or it's not a lever that we can pull"?
Tim Wulfekuhle: Yeah, I've seen from ... or heard, I guess if I haven't seen, anecdotally, from some of the big box shops that they count on collecting 60% to 70% of the rollover dollars. I'll emphasize "dollars," not necessarily accounts; but the rollover dollars coming out of the plan. And they're playing that 30-year long game with that participant to capture that. That's a pretty smart move on their part, really. But then if you take that money out of a low-cost share class within the plan and go into a higher-cost share class outside in the IRA rollover, there's no more cost in doing that rollover or doing the investments in the higher-cost share class, but there's a lot more money in it. So if you're willing to make that bet on your rollover capture, you can subsidize your record keeping with it. And it's not illegal or anything. I'm not trying to make that case. It's perfectly above board. But it's hard for a participant or a sponsor to really decipher if somebody's not pointing it out to them.
Rick Unser: And I think, unfortunately, one thing that, as we look at recordkeeping searches that go on out there, and if you look at the way that people are making decisions about, "We're going to go with this provider or that provider," the reality is, while there's no requirement that you go with the cheapest provider, I think that's something that a lot of people struggle with, where it's like, "Okay, well, we've got three providers that we've interviewed and, man, they kind of sound the same." Now we're just going to say, "All right, well, this one is X dollars per head, or X basis points, and this one is Y dollars per head and Y basis points." It seems like that's a better economic deal for our participants or the company. I don't know that there's a tremendous amount of extra diligence saying, "Okay, well, why is that possible?" or, "What is the business model that makes that a viable economic proposal for that particular firm?" Is that a conversation that you're seeing happening out in the marketplace, or is that something that maybe you would like to see happen a little bit more?
Tim Wulfekuhle: I think independent recordkeepers are trying to have that conversation. We'd like to see a lot more of it. But I think that's also where a plan sponsor really benefits from a true specialized advisor or recordkeeping search consultant to take them through that process, particularly if there's any size to the organization. It's well worth the money. It can provide insight into the industry that you're not going to have just as a sponsor, other than just listening to what the people that are trying to get hired are going to tell you.
Rick Unser: And, again, I'll come back to what you said and I'll reemphasize: I don't think there's anything wrong, I don't think there's anything illegal, I don't think there's anything that is fundamentally inappropriate, but I do agree with you. I think that it's something that people should, especially with larger plans or where you have more headcount or whatever, I think it's important to understand kind of that business model of who you're aligning with. And recordkeepers or other providers out there, I think it is something that, as we see this industry continue to evolve and as we continue to see competition and everything else, I think that conversation continues to be ... or will probably grow in importance.
Rick Unser: That was one of the reasons that I was kind of excited to chat with you today: is just to kind of get your perspective on some of those different things and share what's happening in that independent recordkeeping space as an alternative to some of the conversations that are going on with some of the larger providers. Again, some very good providers out there. But I think, to your point, there's very different realities to the way that people do things. As I like to say and as I do on the podcast, "Just ask a lot of questions and make sure you understand where you're headed."
Tim Wulfekuhle: Yeah, and I understand too that it's easier for us to have a holier-than-thou attitude towards something that we're doing already and would benefit across the industry. I mean, I get it. But it's also possible that we do it that way because we believe in it, not believe in it because we do it that way.
Rick Unser: Yeah, well said. I guess, again, as you kind of sit there in the independent recordkeeping space, what are some other things that you're seeing or what are some other realities that you're thinking about or talking about that maybe we haven't hit on yet in the conversation today?
Tim Wulfekuhle: In the independent space, I think when you're talking about risks, I see the risk as much on the systems we're all using as any outside risk as well. So, yeah, there's only two or three places to go for systems, and as independent recordkeepers we have to band together to make sure that can ... we get continued development out of those systems, and that may mean we have to pay a little more for them to stay up instead of just trying to beat the costs down all the time and then wonder why you're not getting any development.
Rick Unser: Right. "Hey, we want to pay less and get more."
Tim Wulfekuhle: Yeah, welcome to recordkeeping.
Rick Unser: Exactly.
Tim Wulfekuhle: And many other industries, of course. But it's going to be vitally important that those system providers invest, and it's going to be up to us to make sure that they're able to as well.
Rick Unser: And that just brought up an interesting question or thought in my mind. I think as you hear recordkeeping pitches there are those that say, "Hey, we have our own proprietary recordkeeping software and systems and that gives us all these great advantages." Then, on the flip side it's, "Hey, we are aligned with this recordkeeping technology and that means that we can do this, that and the other thing, or bring this efficiency or economies of scale to you because we're part of this broader network or platform." What are some of the nuances in those conversations? I mean, is it better if you can have the scale and size to have your own proprietary recordkeeping system? I mean, is that truly better than not or being a cog in a wheel, or vice versa? Or is it just understanding the pros and cons?
Tim Wulfekuhle: I think it's in understanding pros and cons and where are you as the recordkeeper kind of positioned in the market. Certainly, the largest organizations are probably going to benefit most from a proprietary system, because they do have that control over it, which is pretty nice. You can get the changes you want done. You can decide if you want to invest in them or not and move forward at that. If you're in a third-party system, as we are ... actually, we're on a couple of them ... but when you're on a third-party system you have to work with that system provider or figure out how you're going to operate that system.
Tim Wulfekuhle: There's different ways you can do the systems, where some of it you kind of contain the custom ability of it so that it's easier on users and kind of the outward face is the same for all clients; and some you can kind of just take it as the engine and run your own website, which can be customized at a plan level. So you have to figure out where you want to operate and what client you're going after that cares. If you're going after a customized client market, you probably need to be able to control the website yourself, but for most independents, other than the very, very largest ones, I think most of us are on a leased system.
Tim Wulfekuhle: Whether they operate it in-house or use their ASP model is the next decision. I mean, using the ASP, generally you get better data security and business continuity.
Rick Unser: And what is the ASP?
Tim Wulfekuhle: Oh, it's Administrative Service Provider. It's basically ... your recordkeeper houses the hardware, your software sits on their stuff, you remote into it. And they're responsible then for the data security and continuity and backups and all that stuff.
Rick Unser: Got it. And, obviously, data security, cybersecurity, protection of personally-identifiable information, I mean, those are all huge hot button, trigger words, et cetera. As you think about that, I mean, as an independent recordkeeper are you providing the same solution or protection to clients? Or as you think about some of the big box providers out there a lot of people are touting how many millions of dollars they're spending on cybersecurity and data protection and fraud, et cetera. As you think through that what's your thought process there? I mean, is there an advantage to being bigger in that conversation or not?
Tim Wulfekuhle: Running through the ASP, you can be bigger than you are yourselves. It lets you get the bandwidth of the other people on the ASP. Yeah, I think. I mean, fraud is rampant in this industry. I would question anybody that said they have not been at least attempted on the recordkeeping side of fraud. It is a constant. We probably have attempts every, I don't know, week or two weeks.
Rick Unser: And just to clarify that, is that system-levels attacks where you're seeing some of the things that maybe have affected the retail industry where, "Hey, you've got 10 million credit cards that were just stolen via a data breach, or 10 million Social Security numbers that were stolen via data breach"? Or is what you're seeing as fraud or attacks people that are trying to impersonate another individual and access their account, or somewhere in between or both?
Tim Wulfekuhle: It's the latter. It's low-level fraud with high-level consequences; people impersonating either by phone or by form. We get fraudulent forms all the time. Sometimes they have the real participant's signature on it that they lifted online somewhere and scanned on; fraudulent notary stamps of a real notary stuff. They're out there. And, yeah, every attempt: on the phone, impersonating, getting access, trying to do it on the web. I think as an industry, at least on the independent side, we've ... the first line of defense in that was to slow down the process. We all rushed for the last 10 years to be able to get participants to get their money easier and faster.
Rick Unser: Yeah, "We'll have it to you tomorrow."
Tim Wulfekuhle: Yeah, "We'll ACH it to this account that we can't verify." Looking back, it was pretty dumb. Right? It just was. We've gone to ... most independents I'm aware of have gone to just sending out checks now, back to mailing it to your home. Participants seem to understand. If they don't, we always tell them, "Okay, well, show me another place where you can call up with basically any verifiable information that they got from the Equifax hack, and somebody ACHs you $200,000 tomorrow. It doesn't happen in any other industry. Why would we do it?"
Rick Unser: Yeah, and it's funny, and I've had those conversations as people have rolled out more security measures and multifactor authentication and all this stuff, and we have, like, "Well, hey, we've got an employee that just moved and they really need their money. Why do they have to wait 2 weeks or 30 days or whatever?" I think people kind of forget the amount of attempted fraud and the gravity of sending, to your point, $200,000 of somebody's retirement savings to a bank account that will never be seen again if it's the wrong one.
Tim Wulfekuhle: Yeah. And I think that, both on the independent and the bundled side, we're doing a better job of talking to each other, at least behind the scenes, about what's going on in each other's shops so the other one could help prevent something if it's a new type of fraud attempt. In the past, there was kind of almost a shame to it. You never divulged that you had attempted, much less successful fraud. But now everybody's like, "We're in this together. We have to protect these people's money." And you know where the sponsor's going to go if somebody loses money.
Rick Unser: Yep, I'm with you. Maybe one last question and, depending on how you answer it maybe it's the last one, maybe it's not, but I know there's a lot of focus on brand in our space. 401k is part of a benefits package, and employees are harder and harder these days to recruit and retain. So as an independent, how do you guys think about brand? How do you talk to clients or prospects about brand? Because I think there are certain companies out there that the cachet of a large name that rolls off the tips of the tongue of their employees, there's the perception that that brings a certain amount of cachet to their retirement plan. I would imagine that's something you guys think a lot about or talk a lot about. So how do you think about that and how would you communicate concerns that somebody might have about choosing an independent recordkeeper or staying with an independent recordkeeper if they're considering or maybe have proposals from some large, very well recognizable brands?
Tim Wulfekuhle: I think there is a giant perception that ... and probably reality too: no one gets fired hiring the big box. Right? And few participants complain about it and, like I said, in the past it fits a lot of plans. So I don't think the day of the independent recordkeeper dominating the market is going to come back. I think there's still going to be a major role for us, but it's not going to be the 90s again.
Tim Wulfekuhle: That said, you can use the brand in a couple ways. You need to get known at least in the advisor and search consultant and somewhat sponsor community to just get a chance, right? If no one knows who you are, you're not going to get that next opportunity. But some sponsors really also like the fact that you're not branding their plan under your banner, that it's their plan, you brand it under their banner, their logo, their colors, their text; back to that participant ownership.
Rick Unser: Yep, and I'm with you. I mean, I've seen that and experienced that. I think that is something that is a little more prevalent when "ABC, ACME Recordkeeper" is not plastered all over everything; that's going to be a little bit more of a possibility and there's a little bit more willingness there with independents. So I totally get that.
Tim Wulfekuhle: Yeah, and with the independents, a lot of times participants don't even know who their recordkeeper is. That's good or bad. You definitely want to have your client's logo in the return window envelope or they just toss it, you know, "Who's mailing me this junk?"
Rick Unser: Yeah, "Who's this anonymous envelope from?"
Tim Wulfekuhle: That goes to kind of our overall discussion as independents: we need to know where our market is, we need to know who our perception of how this should work resonates with. And it's not going to be everybody, and you probably should be able to figure that out before you have to go through the whole RFP process.
Rick Unser: And I guess maybe as kind of a closing thought or a closing statement, as you think about your business and your firm, are there a couple examples of, "Hey, as an independent recordkeeper, here are some markets that we have operated well in and value the role of an independent recordkeeper," that might be just some good examples or food for thought for people to kind of drive a lot of these things that we've been talking about home?
Tim Wulfekuhle: Yeah, they tend to be more ... messier, customized plans. One we have, we do 800 payroll submissions a month, and a lot of them come in on paper with a check stapled to the corner. Not a lot of people want that business. Right?
Rick Unser: A lot of people would run away from that.
Tim Wulfekuhle: Yeah. You just have to figure out the processes to do it. It's messy work. It's highly customized, where they want a single display of their qualified and non-qualified plans with a single sign-on over to their health portal; those kind of things that just don't fit the standard niche. Then, the ones that have a no-solicitation clause on their employees. We do have clients like that, and it's why we had it, at least got the opportunity, is that there's no solicitation. You answer the phone under their name. Everything goes out under their brand. We're a nonentity.
Rick Unser: And I will say that that is something I'm seeing from more employers:is some language around either non-solicitation or specifically outlining what recordkeepers or others can do with or talk to their employees about. So that is one thing honestly that I think is probably going to be a little bit more prevalent in the coming years as we see some of the impact of the lawsuits, as we see lawsuits evolve, Reg BI, maybe the new fiduciary rule. I do think more focus or more emphasis on either, "What are your solicitation policies," or just, "Hey, we'd like you to agree to a non-solicitation," I think that's going to be a little bit more front and center as the market continues to evolve.
Tim Wulfekuhle: Certainly for our own interests we hope so. It just sort of narrows down the competitive field in our experience as far as who will respond; getting back to, "What market are you going to play in?" The big box knows as well what market they're going to play in and what ones they're not. We all should.
Rick Unser: Yeah, I agree. And that's something I've talked to a lot of providers about over the years, is, "Hey, you've got to kind of know who your client is or you've got to be able to call your shots, especially if your name doesn't roll off the tip of everybody's tongue. You've got to know who is that fastball down the center of the plate versus something that maybe you don't want to take a swing at."
Tim Wulfekuhle: Yeah, I couldn't agree more. And I think sometimes you need to look at your client base the same way. Do you still fit them? Sometimes you don't based on changes in them and the market you want to be in. I think you've just got to make that decision sometimes for the good of both you. We always talk a lot about, "How do we get new business?" The current stuff's pretty important too.
Rick Unser: Very well said. Tim, I really appreciate you taking the time today. This was very informative for me and really gave me a lot of good food for thought on thinking about independent recordkeepers, and hopefully others got value out of it as well. Certainly wish you all the best. Certainly would love to have you back down the road as we tackle this topic again.
Tim Wulfekuhle: It would be my pleasure. Thank you for the opportunity. I really enjoyed it. I wish you the best as well.
Recap, Highlights, and Thoughts
The business of being in the 401(k) business has been one of our more popular themes on the podcast. Today, should be no different. My guest Tim Wulfekuhle, President of Northwest Plan Services and I dive into the topic of independent recordkeepers. We start with some thoughts about different types or categories of recordkeepers, what the litmus test for an independent recordkeeper is, how in a rapidly changing environment for service providers they are positioned and what does scale mean. Tim also shares thoughts on consolidation trends, bright shiny objects, capturing employer and employee attention when you don’t have a household brand name and what the future of the retirement business could look like.
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