Data & Research June 17, 2015

Overcoming Plan Sponsor Inertia

It’s not only plan participants that are prone to inertia. Plan sponsors, too, can find it a challenge to step up their retirement plan designs.
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“How many people actually know what they’re saving in their 401(k)s?” asked Anne Ackerley, head of the defined contribution group in the U.S. and Canada at BlackRock.

At a roundtable to discuss retirement at BlackRock in New York, Ackerley said that an informal poll of her own friends and family showed perhaps 40% knew much about their own investments, and very few had real confidence that they are saving enough. The results are common enough, but Ackerley pointed out that 401(k)s are the primary savings vehicle that most people will depend on to fund their retirement. 

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The industry is facing several headwinds, including participant inertia and lack of understanding, increasing longevity and low interest rates that continue to create challenges for investors in attaining rates of return.

Ackerley said the primary job of the industry is to educate participants as well as plan sponsors. “What is the influence and control employers have over that ultimate retirement outcome?” she asked, noting that the goal of any DC plan is to get more people to save; to get them to save earlier and more; and then get people invested in the right vehicles, such as target-date funds (TDFs).

“Change is hard and slow, but there is a new reality,” Ackerley told PLANADVISER. “People have to save more, and I think plan sponsors are really beginning to understand that.”

All the tools plan sponsors need to get people saving already exist, Ackerley said, and even fairly simple actions—raising defaults, the use of auto features—can quantify and illustrate for plan sponsors how plan outcomes can be affected. “We find they are pretty responsive,” she said, “and they’re starting to embrace some of these changes.”

NEXT: The difference eight years can make.

Getting participants enrolled as early as possible in their working careers is key, Ackerley said, illustrating her point with two theoretical 22-year-olds beginning their working lives on the same day. Both earn $50,000 a year. One is auto-enrolled in a TDF at 6% at day one; the other does not beginning making contributions to a DC plan until age 30. “At age 65, [the first] one would have $300,000 more in retirement,” she said.

According to Chip Castille, chief retirement strategist at BlackRock, the conversation is less focused on the accumulated pool of retirement assets, since it’s more productive to consider what those assets can supply in retirement.

In the case of Ackerley’s examples, it’s the difference between 65% and 55% of income replacement in retirement. The two 22-year-olds underscore the substantial difference those first eight years can make to an individual’s retirement, she said.

But plan sponsors themselves must be willing to adopt the appropriate plan design features. “The real trick is to getting people to save more is to raise the default,” Castille told PLANADVISER. Plan participants sometimes look at the features of a plan, sifting for clues, Ackerley said. “If a plan sponsor’s default ratio is 3%, are you saying that’s OK? We all know it’s not.”

Retirement plans, the country and even the planet will have to face the looming challenge of increasing longevity, according to Michael Hodin, executive director of the Global Coalition on Aging.

Longevity is causing profound transformation throughout the world, according to Hodin. There are simply more old people than ever before, he said, and growing old is now the norm. “In country after country, no matter how rich or poor, modern or urbanized, replacement rates of the population are dropping,” he said. The percentage of old citizens to young is also transforming and the impact on fiscal sustain and economic growth, either national or community level, is substantial.

People are simply living unprecedented long lives, he said, which affects income replacement rates in populations all over the globe, and will force countries to address the economic needs and stresses longevity creates. “Longevity changes everything,” Hodin said.

Compliance June 17, 2015

Financial Planning Coalition Applauds Fiduciary Rule

Calls update to a 40-year-old rule “long overdue.”
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The Financial Planning Coalition has endorsed the Department of Labor’s proposed fiduciary rule. The coalition is comprised of the Certified Financial Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors.

“Secretary Perez and the Department of Labor have developed a comprehensive, carefully constructed fiduciary rule that will secure critical protections for American retirement savers and preserve financial advisers’ flexibility and adaptability, regardless of business model,” the coalition said in a statement. “This proposal to update a 40-year-old rule is long overdue, especially given significant, historical changes to retirement planning, requiring Americans to be more responsible than ever for making complex retirement saving and financial decisions.”

The coalition also said that Americans deserve to receive financial advice that is in their best interests and that it hopes the rule is implemented soon. However, the coalition plans to recommend some clarifications to the rule in a comment letter.

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Last year, the coalition issued a white paper, “Consumers Are Confused and Harmed: The Case for Regulation of Financial Planners,” that outlined many of the reasons why the group believes an updated fiduciary rule is necessary. The report noted that “Americans receive financial advice from advisers who use a wide range of titles and are subject to different, often inconsistent, regulatory and ethical standards [resulting in] financial planner professionals largely unregulated or under-regulated. As a result, many consumers have great difficulty selecting a financial planner and are harmed when they receive narrowly focused advice, single product solutions or advice that is not in their best interest.”

The Financial Planning Coalition conducted research and found that “over 100,000 financial service providers incorrectly self-identify as members of the financial planning practice, but do not actually offer comprehensive financial planning services. Lack of regulation of financial planners allows significant numbers of advisers, spurred by economic incentives, to hold themselves out to consumers as financial planners or providing financial planning services without meeting basic competency and ethical standards. Consumers are confused by the many titles that financial services providers use, which in conjunction with industry misrepresentation, makes it difficult for them to find competent and ethical financial planners.”

The white paper noted that there are three primary types of financial planners, each of whom is subject to different regulations. The financial planner who provides advice is regulated under the Investment Advisers Act of 1940 and is subject to registration either by the Securities and Exchange Commission (SEC) or the states, depending on the amount of assets they manage. They are held up to a fiduciary standard of putting the interests of their clients first.

Brokers are regulated under the Securities Exchange Act of 1934, must register with the Securities and Exchange Commission (SEC) and become a Financial Industry Regulatory Authority (FINRA) member. FINRA only requires them to recommend suitable securities to their clients. A financial planner who sells insurance products must be licensed by a state insurance department as either an insurance sales agent or an insurance consultant or adviser. “Unfortunately for consumers, this lack of regulation leaves significant gaps in the oversight of the delivery of financial planning services,” the Financial Planning Coalition said. “The current regulatory scheme that allows for non-fiduciary advice, dependent upon the services provided or the licenses or registrations held, is not appropriate or sufficient to fully protect consumers.”

The coalition noted that the “CFP Board has been a leader in protecting consumers and promoting excellence in the profession by establishing competency and practice standards, as well as a code of professional conduct through the Certified Financial Planner certification” and that today, there are more than 70,000 CFPs throughout the U.S. The new fiduciary rule would hold all financial planners up to this standard, the coalition said. “Establishing clear qualifications and standards for financial planners—similar to the standards established by the CFP Board—will enable consumers to distinguish between financial planners who are able to provide competent, comprehensive and ethical advice and those who offer limited product solutions without regard for the client’s broader financial interests.”

Earlier this year, the coalition issued its interpretation of the fiduciary rule, noting that under DOL’s proposed definition, a fiduciary adviser is “any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, plan participant or IRA owner for consideration in making a retirement investment decision. The fiduciary can be a broker, registered investment adviser, insurance agent or other type of adviser. It is important to note that the DOL will determine who is a fiduciary based not on the adviser’s title, but rather on the advice provided to the client.”

The DOL, the coalition said, excludes some areas from the fiduciary obligation, namely, “general education on retirement savings, order-taking and brokers who pitch to large plans with a degree of sophistication.”

The DOL’s rule, the coalition continued, also “includes new, broad, principles-based prohibited transaction exemptions (PTEs) that can accommodate a range of evolving business models,” such as the “best interest contract exemption [in which] advisers and firms must enter into a contract with their clients that: commits the firm to enter into a contract with their clients that: commits the firm and adviser to providing advice in the client’s best interest; warrants that the firm has adopted policies and procedures to mitigate conflicts of interest; and clearly and prominently discloses any conflicts of interest that may prevent the adviser from providing advice in the client’s best interests.”

Comments received about the DOL’s proposed fiduciary rule can be found here.

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