In Practice September 30, 2015

PANC 2015: Micro Plans

Moving down market can be lucrative, executives say.
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“Plan sponsors with less than $20 million in assets under advisement are generalists with a lot of responsibilities, and they are strapped for time,” said Benjamin Lewis, senior managing director, direct plan market, at TIAA-CREF, speaking on the “Micro Plan” panel at the 2015 PLANADVISER National Conference in Orlando, Florida. “They need an efficient solution and are not very well covered, so it is a great opportunity to grow your business. Their process is simplified. They rely on referrals as opposed to RFP [requests for proposals]. If you have experience in their industry, they value that.”

In the not-for-profit K-12 education space with 100 or more employees, only 25% use advisers, Lewis said. In the corporate space as well, “sponsors are underserviced,” said Jennifer McPherson Franton. “The opportunity is there for you to differentiate yourself. Why are advisers moving down market? Advisers in the mid to large market are getting squeezed. They have to reduce their pricing, which is why advisers are looking down market for more stable clients.”

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Of the billions and billions of dollars of assets in 401(k) plans in the United States, a surprisingly large portion is in the micro market, noted Jason Roper, divisional vice president at MassMutual Retirement Services. “You can really be a hero for these clients,” he said.

As to what micro plan sponsors are seeking help on, they want help on the basics. “They want to reduce their effort and risk and provide service to their participants,” Lewis said. “Ninety percent of micro plan advisers consult on investments and provide education. Fifty-five to 60% conduct fee assessments and compliance monitoring.” They are also particularly interested in 3(38) fiduciary services, he said.

NEXT: Seeking out the micro plan business

“The smaller the plan, the more likely they will turn to their personal financial adviser, so retirement adviser specialists can partner with wealth management advisers,” Roper said. “That gives you a great opportunity to get into the micro space.”

Lewis said that TIAA-CREF specializes in the not-for-profit space, and that to find leads, he turns to the C-suite, since many of those executives serve on not-for-profit boards. “Third-party administrators are also a great source for leads across all the markets,” he said.

As advisers go down market, they need to move from customized models to standardized models, McPherson Lewis said. “Platform providers can supplement you with such things as education,” she said.

It is also critical for advisers to educate micro plan sponsors on the importance of an investment policy statement and a retirement committee, Roper said. Furthermore, small plans often want ancillary offerings, such as 529 college savings plans, Roper said.

As far as what trends from the large plans are moving down market, smaller plans are beginning to embrace more aggressive approaches to plan health and financial wellness, Roper said. “Clearly, what happens in the large market eventually moves down market,” he said. In addition, smaller plans are beginning to issue RFPs, McPhearson and Franton said.

TIAA-CREF has developed a tool specifically for micro plans that shows participants their income replacement ratios, Lewis said. “We use that in advice sessions with participants. We can show them how they compare to other individuals,” he said.

The Markets September 30, 2015

PANC 2015: Asset-Allocation Models and QDIAs

Carefully thought out default investments solve real plan problems and help plan sponsors feel more confident in automatically enrolling participants into retirement plans.
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The 2006 Pension Protection Act (PPA) ushered in use of qualified default investment alternatives (QDIAs) with safe harbor, said Jason Johnson, senior vice president of wealth management, UBS Financial Services, moderating a panel on Tuesday at the 2015 PLANADVISER National Conference in Orlando, Florida. “Many employers recognize that their employees don’t have retirement plans in place,” Johnson said, and asset allocation models and QDIAs allow them to place plan participants in the plan with a safe harbor.

The QDIA safe harbor requires that a plan sponsor meet several conditions, including participant notification, allowing participants to opt out of the default fund and broad diversification on the investment menu.

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Key challenges for employers, said Scott Wittman, chief investment officer, asset allocation and disciplined equity at American Century Investments, are the myriad risks to balance when saving for retirement. Putting everything into stable value or money markets might eliminate market risk, but this strategy can make longevity risk skyrocket.

One enormous change that took place with the move from defined benefit to defined contribution (DC), Wittman said, was all-professional decisionmaking. “In DC plans, the ultimate decisionmaker is the participant,” he noted. “The best designed plan in the world is not going to meet its goals if the participants can’t use it effectively.” Downside risk and excessive volatility both challenge participants’ judgement, Wittman added.

Glide path construction can help manage risk, said Benjamin Richer, director asset strategies, portfolio manager, Nationwide Funds Group. His group combines the three approaches—conservative, moderate and aggressive—into one glide path: more aggressive in the further-dated funds for younger participants. “In the middle of the glide path, we take a more moderate approach,” he explained, “and as the participant nears retirement, we’re more conservative than the market.”

NEXT: Customization could be the answer—but is it worth it?

The one-size-fits-all approach may not work much longer, said Brad Thompson, chief investment officer at Stadion Money Management. “We’re telling 35-year-olds now how to manage their money,” he said, “but going forward, they’re going to be telling us how to manage their money.” The rise of smart phone usage and Millennial attitudes indicate that plan participants will pay more attention to their accounts, and he believes Millennials will want custom solutions.

Another drawback to a single approach: Participants tend to set it and forget it. “So they don’t increase their participation rates,” Thompson explained. “That’s where managed accounts are starting to gain momentum, but target-date funds are getting most of the assets.” Implementing the customization and personalization features that Millennials want makes the funds attractive and is a chance to add value as an adviser.

Before going down the customized solution route, Wittman said, ask three questions:

  • What are the plan demographics? Most 25-year-olds have relatively small assets and their goals are similar. Participants in their 60s can have a range of goals, and assets tend to be more substantial.
  • Do you have enough information to customize? He cautions that customizing at the plan level is not useful.
  • Is customization worth the additional cost? “The focus on fees is intense,” he emphasizes. “It’s hard for plan sponsors to justify additional 20 basis points to get a customized solution.”

An increasing number of plan sponsors are interested in re-enrollment, Wittman said. The health of the plan, raising the participation rate and getting people engaged are all very important—and re-enrollment, a close cousin of automatic enrollment, is key.

True, added Wittman, many plan sponsors are afraid of negative pushback from participants—a concern he called legitimate but generally unfounded. Employees are most often very accepting, and auto-enrollment dramatically improves plan health. “One plan sponsor was concerned but did the re-enrollment of 1,500 participants anyway,” he said. “Exactly nine people called, six of whom wanted to know their PIN number.”

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