Data & Research May 5, 2016

Big Jump Measured in Share of Advisory Clients in Retirement

“Given so many Baby Boomers are retiring or preparing for retirement, it is not surprising that advisers are seeing more of their business dominated by the needs of these consumers,” says Jafor Iqbal, assistant vice president, LIMRA Secure Retirement Institute. 
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Half of all financial advisers polled by LIMRA Secure Retirement Institute say the majority of their business consists of pre-retiree and retiree financial planning, up a whopping 40% over 2011.

While targeting younger clients will obviously be important for long-term business sustainability, according to the Institute’s estimates, “retiree households will control more than half of all investable assets (approximately $25 trillion) by 2023.”

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“Managing these assets and their de-accumulation for their clients will be very important for the foreseeable future,” Iqbal explains.  

LIMRA Secure Retirement Institute also found advisers have expanded their retirement income planning services significantly since 2011, especially as it pertains to the number of advisers offering Social Security claiming strategies. The group offering such services has more than doubled in size since 2011, jumping from 33% of advisers to 70% of advisers in 2016.

Other increasingly popular elements of elder client service include advice on required minimum distribution (RMD) planning, long-term care, sequence of withdrawal planning and defined benefit pension claiming strategies. According to LIMRA polling, all of these categories saw double-digit growth over the last five years, and overall, eight in 10 advisers say they are spending more time on retirement income planning.

NEXT: Other service elements remain the same 

While some aspects of advisers' businesses have shifted significantly since 2011, LIMRA Secure Retirement Institute also finds both advisers and consumers still believe minimizing the risk of running out of money and reducing portfolio volatility are two of the three most valuable services an adviser can provide.

“Researchers found that while advisers consider offering a realistic view of retirement lifestyle a valuable service, consumers say creating a formal written retirement plan is more important,” Iqbal says. “Interestingly, advisers surveyed in 2011 listed formal written retirement planning as the second most valuable service, which aligns with consumers’ perspectives.”

For those who are offering formal written retirement planning services, nine in 10 advisers say it “helps them better understand their clients’ goals, improves retention and increases their clients’ confidence in their retirement readiness.”

When asked about the potential impact of the Department of Labor fiduciary rule, the majority of advisers (55%) “acknowledge that the new rule will likely deter them from serving small investors and half say they will stop handling small rollover business.”

“We are also concerned that the new DOL fiduciary rule may have a negative effect on advisers’ willingness to recommend guaranteed lifetime income products to their middle income clients,” Iqbal concludes.

Additional data and other research is at www.secureretirementinstitute.com. 

Client Service May 5, 2016

Helping 403(b) Clients with Best Practices

Advisers can help 403(b) retirement plan sponsors with plan design and fiduciary best practices, according to Brad Holterhaus with Principal.
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The Plan Sponsor Council of America’s (PSCA’s) last 403(b) Survey found 403(b) plans were still catching up with retirement plan best practices, Brad Holterhaus, director of Tax-Exempt Markets at Principal, told a group of attendees of the PSCA’s 69th Annual Conference.

Overall, Principal suggests plan design best practices:

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  • Automatically enroll participants at a deferral of 6% of salary (While more than half of 401(k) plans auto enroll participants, only 16% of 403(b)s do, the PSCA survey found);
  • Automatically escalate deferrals each year up to 10% of salary;
  • Do a re-enrollment to sweep in all employees not participating or not participating at a 6% deferral rate;
  • Choose an appropriate qualified default investment alternative (QDIA) for the plan; and
  • Stretch the match to get employees to save more.

Holterhaus clarified that his discussion was about Employee Retirement Income Security Act (ERISA)-governed 403(b) plans.

Other plan design best practices include streamlining the plan’s investment lineup. Holterhaus noted that the average number of options in 401(k) plans is 19, while the average in 403(b) plans is 29—and the average is 43 for plans in the 1,000 or more participants range.

Using a single recordkeeper can also help streamline the plan and its administration. “About 83% of 403(b)s have moved to a single provider, and we expect that trend to continue,” Holterhaus said.

He suggested a retirement plan adviser can help 403(b)s with plan design and recordkeeper selection, and he shared a case study providing an example about how advisers can help. Holterhaus said one plan sponsor didn’t like its current recordkeeper, but it didn’t know what to do about it. The plan’s payroll provider suggested the plan sponsor freeze the 403(b) and adopt a 401(k) plan instead. Now the plan sponsor has two plans to administer and for which it has to file a Form 5500. Holterhaus told conference attendees an adviser would have led them differently by doing a request for proposals (RFP). He also suggested that best practice is to do an RFP to at least benchmark providers every three to five years.

He noted there are fewer providers in the 403(b) space than in the 401(k) space. Plan sponsors should make sure the provider knows the tax-exempt market, has the technology and investment options needed for plan administration and design, provides participant education, and can administer other plan types such as defined benefit plans and non-qualified plans.

NEXT: Fiduciary best practices

Since passage of 403(b) regulations in 2007, 403(b) plan sponsors have been getting a grip on their fiduciary responsibilities, but many are still falling behind. Of non-profit organizations that sponsor 403(b) retirement plans, 60% are reviewing and evaluating the investment options in their plans themselves, according to the latest 403(b) Snapshot Survey from the PSCA and sponsored by the Principal Financial Group.

Holterhaus said the best practice is to have an investment expert review and monitor investments. He also suggested that having an investment policy statement (IPS) in place and following it is a best practice. He noted that half of 403(b) plan sponsors surveyed indicated either they do not have an IPS or they are unsure if they do.

The good news is more 403(b) plans are doing quarterly and semi-annual investment monitoring rather than annual or less frequent.

Holterhaus said the number of 403(b) plans being audited is up about 8% to 10%. He suggested plan advisers can help plan sponsors with compliance and fiduciary responsibility, providing another case study. A 403(b) plan sponsors filed a Form 990, required by non-profits, which indicated it provided an employer match to employees in its 403(b) plan. However, the plan had not filed a Form 5500, so that sent up a red flag to the Internal Revenue Service (IRS). The plan also had no plan document, something required of 403(b)s since 2009. The plan sponsor hired an adviser who helped it get a plan document in place and correct compliance errors with the IRS. Holterhaus said, with the adviser’s help, the plan sponsor paid no fines or penalties and it didn’t have to go back and correct for prior years.

Providers can also help 403(b) plan sponsors with fiduciary responsibilities, Holterhaus noted. For example, Principal offers a fiduciary document catalog and a fiduciary activity log report.

Holterhaus concluded by telling conference attendees they should be measuring plan success by the retirement readiness of participants. He noted that many retirees who work later say they do so to keep employer-sponsored health care. Older employees are more expensive to employers. While it is still good to measure plan participation and participants’ savings rates, the true measure of success is how many participants are on track to replace a certain percent—70% to 80%—of income in retirement.

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