Plan Sponsor Scrutiny Elevates Adviser Businesses

There is a short but crucial list of administrative and investment tasks for which retirement plan sponsors demand in-depth services from their advisers, and advisers who hope to stick around for the long term must proactively support all of them.

The most essential support that sponsors expect is help with the investment lineup, followed by compliance and fiduciary protection, analysis of fees, provider evaluation, participant education, regulatory and industry updates, and plan metrics/outcomes.

“Plan sponsors have become much more proactive in the last year because they believe the new fiduciary rule increases advisers’ responsibilities,” says Andy Schwartz, a principal with Bleakley Financial Group in Fairfield, New Jersey. 

Scott Austin, a partner with Hunton & Williams LLP in Atlanta, believes that sponsors have also become more attuned to advisers’ services in light of the increased litigation of the past few years and the DOL’s fee disclosure rules in 2012. He is advising the fiduciary committees at his plan sponsor clients “to take a look at their outside advisers and investment managers to understand what their current contractual arrangement purports to be, and whether it is consistent with the new fiduciary rule.”

“Clearly, a thorough analysis of the plan’s investment lineup on an ongoing basis is critical,” Austin continues. “Advisers must oversee and monitor all of the plan’s investments and provide periodic reports, not only on the performance of the funds but also on the underlying fee structure.”

Advisers should benchmark the performance of each investment option at least annually, Schwartz agrees. “However, that is just the first step,” he says. “No mutual fund is the best performer in every environment, so it is important that this process is both quantitative and qualitative. In other words, do not replace an investment option simply because it underperforms. You need to understand why it underperformed so that you can determine the probability of its recovery.”

NEXT: Compliance and regulatory protection

The next most important thing advisers should be providing their sponsors is either 3(21) or 3(38) fiduciary protection, Schwartz says. “We believe advisers should be the one signing off as the 3(38) fiduciary for no additional fee,” he argues.

Next, advisers need to analyze the fees their plan sponsors are being charged and benchmark them against similar plans, Schwartz says. “Fees have been at the center of attention for retirement plan providers over the past decade,” he says. “Obviously, they are important because they can detract from the growth of participants’ assets.”

In line with this, advisers must help sponsors select and continuously monitor their providers and periodically issue requests for information (RFIs) to determine whether they are receiving all of the services available on the market, says Tyler Finlinson, director of business development at Soltis Investment Advisors in St. George, Utah.

Educating participants about the importance of participating in the plan, how much to contribute and diversification is critical, says Tom Foster, a spokesperson for MassMutual Retirement Services in Enfield, Connecticut. In fact, MassMutual learned through a survey of sponsors, “A Winning Combination: What retirement plan sponsors value most from financial advisors,” that for 80% of them, this is the number one service that they expect from their advisers.

NEXT: Plan metrics

And while sponsors are accustomed to looking at participation and deferral rates, along with average balances, as more advisers evaluate outcomes and retirement readiness, new thinking about plan metrics is coming to the fore, Foster says.

“Using a variety of plan metrics is the only real way that advisers can quantify if they are doing a good job,” he says. “The one thing we as an industry have fallen down on is measuring outcomes. You can have a 100% participation rate, but if the deferral rates and the allocations are off, the outcomes may not be optimal.”

The 2016 PLANADVISER Practice Benchmarking Survey found that the top three success measures that advisers use for their plan sponsor clients are participation rates (77%), deferral rates (70%) and competitive benchmarks of plan design (65%). Only 50% calculate the percentage of participants on track to meet their retirement income replacement goals.

Finally, advisers need to keep sponsors up to date on regulatory and industry developments, Foster says. Indeed, the MassMutual sponsor survey determined that they are looking for proactive service from advisers, he notes. Ninety percent of the sponsors surveyed said advisers being proactive about potential compliance issues is either extremely or very important.

“Sponsors want to know that their advisers are responsive, listening to their and their participant concerns, and keeping them up to date on regulations and laws, which are constantly changing,” Foster says. “With the new [Trump] administration, there could be tax reforms and new regulations. Sponsors will want help understanding how these potential changes will impact their plan.”