2017 PLANADVISER Adviser Value Survey

Why do plan sponsors hire retirement plan advisers? Is it to help them improve their plans? To improve plan governance? To bring expertise the plan sponsor does not have? Arguably, often for more than one of those reasons, and likely for others, as well. In any event, it is likely a plan sponsor hiring an adviser will anticipate some sort of measurable outcome that the adviser will provide—a return on investment (ROI) of sorts. In that case, an expected ROI might be that adviser-led retirement plans have appreciably better metrics and results than other plans.

For many advisers, there is good news: According to the 2017 PLANADVISER Adviser Value Survey, plans overseen by advisers are often better off. This is particularly evident when it comes to plan design and oversight—such as the use of automatic features, an investment policy statement (IPS) and quarterly investment reviews. The adviser can point out his years of experience using successful elements of retirement plans and, thereby, reassure his sponsor clients to step up to the plate and make the right, and sometimes brave, decisions for their plan.

However, when it comes to average balances, plans without an adviser actually have higher balances, which would seem to indicate that, in some areas, advisers have much more work to do to show a prospective plan sponsor client the ROI of hiring them.

The 2017 PLANADVISER Adviser Value Survey is based on the responses of 4,218 sponsors who participated in the 2016 PLANSPONSOR Defined Contribution (DC) Survey.

Seventy-eight percent of plans with an adviser have a company match, compared with 73% without an adviser. The fact that adviser-led plans will more likely have a match comes as no surprise to Rick Unser, ERISA [Employee Retirement Income Security Act] risk management consultant at Lockton Financial Advisors LLC in Los Angeles. “Where an adviser can have an impact is to help his clients determine if their current matching strategy helps attract or retain employees and if it is structured in a way that will encourage employee contribution levels necessary for them to make a timely transition into retirement,” Unser says.

Thom Shumosic, owner of MidAtlantic Retirement Planning Specialists in Wilmington, Delaware, agrees: “When a company relies on a direct-sold or bundled retirement package, it is simply not going to get anywhere near the same level of consultation that it will from an adviser, who can sit with the plan sponsor and its accountant and come up with the best possible plan design, including matching formulas or profit-sharing contributions.”

Plans with an adviser are more likely to deposit participants’ contributions and matches every pay period (73% vs. 70%). This way, Shumosic says, “it’s easier to budget, and employees like seeing [the contributions] go in every pay period. What’s not to like?”

Steven Glasgow, senior vice president at Avondale Partners in Nashville, Tennessee, says making contributions every pay period is one of the great benefits of retirement plans. “The sooner a contribution is made into the plan, the better, as it allows the investments more time to compound.” He says participants also appreciate seeing the employer match regularly, and this “can help with employee relations.”

The presence of an adviser makes no real difference in terms of whether employee contributions or company matches immediately vest upon enrollment—a benefit at 35% of plans with an adviser and at 37% without. These low percentages make sense, advisers say. “In most cases, it’s because employers want to make sure their employees are going to stay,” Shumosic says.

Glasgow echoes these thoughts, noting that some industries have high turnover, and “if a participant leaves, then the forfeited match dollars are available to offset other employer contributions or plan expenses. Unless there is significant pressure, from an employee attraction and retention perspective due to competitive pressures, there would be no reason for an employer to immediately vest contributions made on behalf of a new and untested employee.”

Automatic Features
The survey showed a significant difference between plans with and without an adviser when it came to the use of automatic features. “[Adopting these] is paramount,” says Dan Peluse, director of retirement plan services at Wintrust Wealth Management in Chicago. “In almost all cases, the implementation of automatic plan features is the most impactful decision a plan sponsor can make.”

Forty-eight percent of plans with an adviser automatically enroll participants, compared with 37% of plans without an adviser, and 45% of plans with an adviser automatically escalate participants’ deferrals every year, compared with 30% of plans without an adviser.

Advisers should be prepared to stress to plan sponsors the critical importance of these “auto” features—and at meaningful percentages, says Unser. “Most employers I speak to understand the concept and know it is likely the right thing to do but need to be reassured with the facts, employee reactions, and examples of how others like them have taken the leap to add automatic enrollment and escalation and that it will not blow up in their face,” he says.

According to the survey, another key benefit that advisers bring to retirement plans is the use of a written IPS: 76% of plans with an adviser have such a document, compared with 56% of plans without an adviser. “An IPS that is written properly ties to their actual investment monitoring process and, if followed, is vitally important to demonstrate plan fiduciaries are following a process to evaluate and monitor plan investments,” Unser says.

Shumosic says the IPS is a good way for advisers to “keep score” on the retirement plans they serve, likening it to a “report card.”

Perhaps counterintuitively, as much of the industry expresses concern about plan leakage, plans with an adviser are also more likely to have a loan provision (83% vs. 76%) or a hardship withdrawal provision (88% vs. 83%).

Glasgow thinks these numbers should be reversed. He is opposed to granting loans or hardship withdrawals and believes advisers should discourage sponsors from allowing them. “As advisers, we want our clients to eliminate as many sources of leakage as possible. We have had success in convincing clients that the existence of loan provisions has little impact on participation, deferral rates and other success metrics—and in having those clients reduce or even eliminate the loan provisions of a plan,” Glasgow says.

The survey showed that mutual funds are the overwhelming favorite investment vehicle of retirement plans, being used at 92% of plans with an adviser and 90% of plans without. However, separate accounts are slightly more prevalent at plans with an adviser (21% vs. 20%), as are collective investment trusts (CITs)—17% vs. 12%.

“I certainly expect more advisers and plan sponsors will evaluate the use of separate accounts and CITs, but I don’t foresee either posing a significant threat to mutual funds anytime soon, due to the continued compression of mutual fund fees and the migration to zero revenue-sharing options,” Peluse says.

Frequent Investment Reviews
The advisers agree that another survey finding is critical: 44% of plans with an adviser conduct quarterly investment reviews compared with 23% of plans without an adviser. “This is an extremely important function of a plan adviser and a critical task of all plan fiduciaries,” Peluse says. “The investment review process should illustrate the due diligence the plan committee and the adviser have adopted to review the current plan investment options and available alternatives.”

Likewise, 74% of plans with an adviser conduct an annual review of their administrative fees, compared with 70% of plans without an adviser. Glasgow says the percentage of such adviser-guided plans could, and should, go higher. “Advisers should be monitoring fees continuously, as facts and circumstances in this industry are changing dynamically and rapidly,” he says. “A formal review of plan expenses should happen at least annually, and advisers should be leading that effort, as they are in an important position to be able to find and understand those expenses in ways that sponsors frequently don’t.”