2016 PLANADVISER National Conference

Illustration by: Harry Campbell / Photography by: Josh Ritchie

The New Fiduciary Rule
The new fiduciary, or conflict-of-interest, rule from the Department of Labor (DOL) expands the type of advisers deemed to be fiduciaries to individual retirement accounts (IRAs) and retirement plans, according to Tom Clark, of counsel with the Wagner Law Group.

He told attendees of the 2016 PLANADVISER National Conference in Orlando that the new rule targets broker/dealers and registered representatives. It impacts registered investment advisers (RIAs) who offer rollover advice and managed account offerings.

With the new rule, the previous five-part test for determining whether someone is offering fiduciary advice is gone. Now, essentially, there is a two-part test, Clark said—whether someone makes a “recommendation” and is paid a fee. He added that the rule defines a “recommendation” as anything that can be reasonably viewed as a suggestion to engage in a particular course of action.

There are still questions about whether some things are considered “recommendations” under the new rule, and the DOL has promised some soft guidance about this, according to Clark. “Now recommending a provider is a fiduciary duty,” he said. “For example if an adviser does a [request for proposals (RFP)] and makes any quantitative statements about the results, that is a fiduciary act. If a wholesaler says, ‘I think you should use this adviser,’ that can fall into the category of recommendation.”

As a result of the rule, some advisers are in the process of selling their wealth management businesses, according to Clark. Others are hiring certified financial planners and buying wealth management companies, while some are partnering with third-party wealth management providers.

Advisers should identify all products and services offered to retirement plans and individual retirement accounts (IRAs) and confirm they have adequate supervisory control in place, according to Clark. They should also identify all instances of variable compensation.

The first deadline for the new rule is April 10, 2017. “A ‘transition’ BIC requiring disclosure should be used, and a BIC exemption officer should be designated,” Clark said.  As of January 1, 2018, advisers should use a full-blown BIC for IRA and ERISA plan clients.

Fiduciary Rule Aftermath for RIAs
The Department of Labor’s (DOL’s) new fiduciary rule will impact registered investment advisers (RIAs), even though they already have been acting as fiduciaries, speakers said.

“You will need to spend time with lawyers to figure out what you can and cannot say, mutual funds will develop new share classes, you will need to conduct more due diligence on [the] options [you present to clients] and [it will be critical to] document processes,” said Gerald Lins, general counsel with Voya Investment Management.

Fiduciary Rule Aftermath for Non-RIAs
Today there is still much room for advisers to deliver products to tax-qualified retirement plans in a nonfiduciary capacity, observed panelist David Kaleda, a principal with Groom Law Group Chartered. However, this space is going to collapse very quickly under the new fiduciary rule, which will designate essentially anyone offering advice for a fee to retirement plans a full-fledged fiduciary.

“At the end of the day, the big focus is on the sale of investment products to ERISA [Employee Retirement Income Security Act] plans,” Kaleda suggested, “particularly as it pertains to the commission-based sales forces, or non-RIAs. The DOL is very clear that it sees no distinction between selling products to investors and providing investment advice. It doesn’t think that investors grasp the difference, and so it’s doing away with it.”

Commission-based sales forces pushing products out to the ERISA market, if they want to continue working in this capacity, will have to find ways to leverage the best-interest contract exemption, known as the “BIC” or “BICE,” Kaleda predicted. This won’t be easy, but it might not be as hard as some predict, either.

“The BIC is the way of the DOL providing an avenue to get paid per transaction in a much more controlled way that still agrees with the spirit of the new fiduciary rule,” Kaleda said. “Again, it is still possible to make it work with transaction-based comp. There will be a lot of use of the BIC. There is a lot of doom and gloom out there, but in my opinion it is workable.”

John Moody, president of Matrix Financial Solutions, suggested in no uncertain terms that advisers who are not looking at this new fiduciary rule as an opportunity should start packing it in now.

“There is no doubt that this is daunting for non-RIA advisers,” Moody said. “We get it. We are a shop that allows brokers to collect 12(b)1 fees directly from mutual funds. I’ll be frank. It’s hard to picture how we are going to ensure level compensation in our environment, so we’re having to engage with all of our partners and have really deep conversations around how to adjust. Levelizing compensation is a dramatic change.”

The panelists all speculated that some advisories will become flat-fee-only firms.

Next Generation Plan Design
The Pension Protection Act (PPA) provided big drivers to improving defined contribution (DC) plan participant outcomes, said Brian Catanella, institutional consultant and senior retirement plan consultant with UBS Institutional Consulting Group.

Automatic enrollment and automatic deferral escalation increased participation and savings rates, and qualified default investment alternative (QDIA) rules shifted employees to more age- and risk-appropriate investments.

But, plan sponsors are eager for advisers who can look at their plans and help them make these plans more efficient and effective, he said. They want specialists. “They have a fear of litigation, and they want help managing their fiduciary responsibilities,” Catanella said. “In addition, they want to keep costs down, and need education about how they are paying plan fees.” He added that revenue-sharing is not always a bad thing if it provides enough to pay a large part of plan fees.

As far as plan design, convincing plan sponsors to implement auto-escalation is a delicate conversation, according to Catanella. But he says, using data, advisers can make a good case to plan sponsors. “Provide projections of the improvement in participants’ savings and retirement readiness,” he suggested. “Also, point out the costs of employees not being able to retire.”

For plan sponsors concerned about the costs of auto-escalation, one thing to consider is stretching the match. Participants save more and the employer match costs remain the same.

Catanella also said encouraging plan sponsors to do a re-enrollment of all eligible employees is important. Advisers can point out that it could increase participation of non-highly compensated participants, and may help with nondiscrimination testing.

He said getting plan sponsors to measure retirement readiness of employees and providing a savings gap analysis to employees can also drive plan design decisions.

According to Catanella, advisers should encourage plan sponsors to offer overall financial wellness solutions to employees. “It is especially good to help low earners,” he said. “There are lots of vendors that can help with this.”

Finally, Catanella suggested introducing plan sponsors to certain technology, such as smartphone applications that can aggregate participants’ entire financial holdings. These will be especially effective with younger employees, he said.

Refining the Fund Lineup
Target-date funds have done a wonderful job of getting participants’ portfolios diversified, but managed accounts, which are tailored to an individual’s personal situation, can do an even better job, panelists said.

“Target-date funds (TDFs) have been a great benefit for participants to diversify, as people have never understood asset allocation,” said Tim McCabe, senior vice president and national sales director, retirement, at Stadion Money Management. Since first being offered, TDFs now have “to” and “through” retirement glidepaths, as well as emerging market and international exposure—and these are welcome developments, McCabe said. However, because TDFs are not transparent when it comes to their actual holdings, it is “hard to evaluate their risks,” McCabe said.

“TDF investors have done well because of diversification and the fact they tend to remain invested in the funds—but each TDF is completely different,” agreed Ryan Mullen, senior managing director, national sales, for MFS Fund Distributors, Inc.

Looking forward, retirement plan advisers should begin to embrace managed accounts, the speakers said. “Moving from ‘do it yourself’ to target-date funds, TDFs have been a wonderful first step” to getting participants’ portfolios to become diversified “but they are built around the average employee,” McCabe said. “People have different risks and savings patterns, and managed accounts are specific to each participant’s holistic situation. They actually personalize the investments and require the investment manager to act as a fiduciary in the participant’s best interest. In addition, they invest 100% of the assets in the fund. While there is no substitute for an adviser sitting down with a participant, that is just not scalable.”

In addition, managed accounts could potentially offer higher returns in this low-return environment, Mullen said. “You need to ask yourself what you are doing to drive additional alpha,” he said. “Lowering fees helps, but it doesn’t drive alpha.”

Furthermore, advisers need to ensure that people are saving enough and should embrace automatic escalation, said Clint Barker, senior vice president of product strategy and national accounts at Prudential Investments. However, he believes that managed accounts should only be offered to a more sophisticated participant base.

2016 Top Trends
Executives from Voya Financial and MassMutual discussed 10 developments in the retirement planning industry.

First and foremost are new regulations and policies, led by the new fiduciary rule, said Charles Nelson, chief executive officer of retirement at Voya Financial. “Each company will approach it differently,” he said. “Some may utilize the best interest contract (BIC) exemption or retreat from offering certain services.”

Second, is the growing recognition of the cost of employees not being retirement ready. “Many years ago, companies sought to limit their liabilities by freezing their defined benefit plans,” said Tina Wilson, senior vice president, head of retirement solutions innovation at MassMutual. “But that liability still exists if employees don’t have sufficient funds to retire and are financially trapped.”

Third is the need to engineer a retirement plan for success. “401(k) plans were designed to be supplemental,” Nelson. Use automatic enrollment, automatic escalation and reenrollment, he said, paired with qualified default investment alternatives (QDIAs).

Fourth is the value of investments in driving outcomes. MassMutual has studied outcomes in detail and has learned for “savers early on, investments are irrelevant,” Wilson said. “Instead, it’s about how much you save. But at age 40, 45, investments become critical.” That’s why people at this age and older need to be invested in “target-date funds, managed accounts or custom portfolios,” she said.

Fifth, it is important to apply behavioral science to retirement innovation. Choose different platforms” for different enrollment touch points, Nelson said.

Sixth, are data-driven asset allocation solutions. By this, Wilson said, the industry needs to embrace smart data platforms where demographics are tailored to “individualized circumstances to select [a certain] glidepath or custom allocation.”

Seventh is weighing income replacement versus account balances. “Income is the new outcome,” Nelson said.

Eighth is finding solutions for income. “Income is also very personal,” Wilson said. “Solutions need to work for each individual. No one size fits all.”

Ninth is financial wellness that extends beyond the defined contribution plan. This means “holistic solutions to solve income stream needs,” Nelson said.

Finally, participants need help navigating healthcare costs and building true financial wellness, Wilson said.

Leveraging Provider Resources and Relationships
Wells Fargo National Sales Manager for Defined Contribution Ron Cohen had an important warning for retirement plan advisers hoping to build out their own value-added tools.

“When I am in conversation with advisers I often tell them to stop trying to create tools on their own,” Cohen observed. “Chances are it’s already built out there and ready to go, better than you could do it on your own.”

Just as important to consider, according to Kathleen Roche, vice president for retirement consulting services with Commonwealth Financial Network, is that in today’s marketplace, recordkeepers, investment managers and other service providers will generally let the adviser present planning tools and other value-add client deliverables with their own practice’s unique brand and “feel.”

“There is so much choice and opportunity out there that it can frankly be overwhelming,” Roche said. “The first step is to set very clear goals, and once you set your goals, it’s about finding the right wholesaler who can be the most consultative.”

Tim Seifert, vice president and national sales manager with Lincoln Financial Group, agreed that many powerful tools are available to advisers—and most can be accessed as a complementary add-on to existing or future partnerships.

“This is clearly one of the areas where it is important to consider scale,” Seifert said. “The large asset management providers and recordkeepers are pouring millions upon millions of dollars into developing their tools and services backing up advisers on the ground. It will be very hard to keep up with the pace of development.”

“Staffing and compensation has become a real hot topic of late, in terms of demand for value-add tools,” Roche observed. “For example, we have seen a lot of inquiries around tools that help advisers track their practice growth and determine the equation of plans to manage versus staff—and how to reward employees along the line.”

Seifert’s next piece of advice seems obvious but can be easy to overlook, he said: “Make sure you find tools that are actionable. Make sure it’s something that in real, measurable terms is going to get you a client or going to help you keep a client.”

Overcoming Plan Sponsor Hurdles
Many winners and finalists for PLANSPONSOR’s Plan Sponsor of the Year awards cite help from great advisers for making their retirement plans great.

Kimber Dills, vice president of human resources with Mental Health Cooperative, Inc. said the adviser they have now helped with a plan change that did not go over well. The company decided to auto escalate everyone in the 403(b) plan to 6% of salary deferral contributions and automatically enroll new employees at a 6% deferral rate.

“There was a lot of push back, but we provided education and did one-on-ones with everyone concerned,” she said. “Now people are excited when they get their statement and see how much they are saving.”

Likewise, Judi Leccese, Retirement and non-qualified plans manager at Cabot Corporation, said her current adviser helped the company create a very detailed plan about implementing plan changes and was good about teaching the company about extremes and how far they could push things. The adviser did focus groups before the change, and after the change, got management to do town hall meetings with employees. The company had a leveraged employee stock ownership plan (ESOP) that was about to expire and decided not to continue with the ESOP. However, it increased the company match in the 401(k) plan and offered employer-paid financial wellness.

Leccese added that an adviser should want to get to know the company and what is going on in the retirement plan. “By talking, listening and collaborating, [the adviser] helps decide what makes sense for the plan.”

Advisers should also be able to work well with plan providers, both Dills and Luccess agreed. “I work with our advisers a lot, but also work directly with the vendor,” Dills said. “But they both come to education events and the vendor has a backup in case the adviser cannot attend.”

Luccese shared that Cabot has a retirement optimization team, consisting of the 401(k) provider, the non-qualified plan provider, the financial wellness adviser and the plan adviser. “At first we would do quarterly calls,” she said. “This year we are going to meet with 24 vendors, including life and health insurance providers.”

Income Options in Retirement Plans
Glenn Dial, head of U.S. retirement strategy at Allianz Global Investors, said common reasons cited by plan sponsors for not including retirement income products in their defined contribution (DC) plans include portability, technology and fiduciary liability issues. However, he said the bigger issue is that DC plans started as supplemental retirement plans and plan sponsors have been traditionally focused on selecting investments for their plans so participants can accumulate wealth.

Annuities in the past have been used in money purchase pension plans and 403(b) plans, so one would think these issues have been addressed, Dial noted. The government feels it has given plan sponsors what they want in the Internal Revenue Service (IRS) guidance about choosing annuity providers, but plan sponsors want a better safe harbor. He believes target-date funds (TDFs) are the starting point for introducing lifetime income options in DC plans.

Donald Stone, director, DC strategy and product development, and senior consultant at Pavilion Advisory Group, says there is a need for decumulation with TDFs or managed accounts. Even though many of these products carry through retirement, they do not address the fact that participants do not know how to create a paycheck in retirement. Retirement income products would help, but with plan sponsors reluctant to use them, Stone encourages advisers to work with clients to allow for systematic withdrawals from their plans.

Timothy J. Pitney, senior director, institutional investment strategist, TIAA, noted that retirement income options address longevity risk, market risk, interest rate risk and cognitive decline. “Participants want this; they have a genuine fear of running out of money,” he said.

He noted that 403(b)s have been using annuities for years, and though there are still portability issues, he believes these products will come back. TIAA is working on a solution to include retirement income options in TDFs, as well as an arrangement in using liability-driven investment strategies for DC plan participants.

Stone pointed out that there are a number of products available in the retail market, and all can be recordkept if recordkeepers would commit to programming their systems, but recordkeepers are reluctant to spend the money because they are not sure there is demand. “Advisers need to get plan sponsors focused on creating retirement income for participants,” he said. “They can introduce just one product, and add more as they become comfortable.”

Value Propositions of Home Offices
Speakers cited co-fiduciary backing, compliance oversight, retirement plan analysis tools and prospecting expertise as absolutely critical elements of home office support, and this makes sense, according to Jimmy Owen, managing partner with GRP Advisor Alliance. “We are seeing a big focus right among advisers on creating efficiencies and practice protections,” he explained.

“The message we are getting in the marketplace is that, as advisers, you want your job to be about taking care of your clients, and doing the right thing by them,” Owen said. “You want the broker/dealer there to do the back office support work, to free you up to learn about your clients and their unique needs.”

Jason Benham, director of retirement services for Independent Financial Group, agreed, adding that he also hears advisers “talking about, first and foremost, doubling down on their commitment to client service.”

“In addition to this, they are coming to the home office looking for educational opportunities; they want home office expertise available not just in the sense of a call center. They want to be able to dial in and reach a subject matter expert they have a personal relationship with, on demand,” he observed.

Jillian White, senior manager for retirement plan solutions at Cetera Financial Group, highlighted advisers’ search for guidance on how to respond to the pressures of the Department of Labor’s new fiduciary standard.

“At Cetera, for example, we have recently come out with a DOL response website tailored for plan advisers,” she said. “We have one version publically available and one that is more robust but kept internal. The leading advisers are already charging ahead and grasping for this new source of opportunity.”

All three panelists agreed that direct adviser feedback is hugely important for setting the agenda in terms of what the home office is going to do next.

“We are a smaller shop so perhaps it’s a bit easier for us,” said Benham, “but we have some tremendous bottom-up feedback driving some of our newest initiatives. We also have top-down ideas that we implement collaboratively. It’s a very tight feedback loop that we find brings about the best results.”

HSAs and DC Health Care
Christopher Auda, senior director, Marketing and Strategy, at ADP Retirement Services, said the movement of using health savings accounts (HSAs) to save for retirement is a natural convergence.

Chad Metzger, regional vice president, DCIO Mutual Fund Sales, at Nationwide Funds, says HSAs are ideal for advisers because the ‘S’ stands for ‘savings.’ He points out that HSAs have triple tax advantages for employees—savings are put in on a tax-deferred basis, earnings on the accounts are tax-free and distributions from the accounts are tax-free. Metzger added that after retirement age, non-medical-related expenses can be paid from HSAs, but those payments are subject to income tax.

“Employees are being taught by employers that HSAs are spending plans, but to the extent employees can keep from using the savings for current costs and can invest their HSA assets, there is tremendous opportunity for retirement savings,” he said. Advisers can educate employees about the diversification of retirement savings and the tax benefits of HSAs.

Chad J. Wilson, investment director and co-founder of HighTower Fiduciary Plan Advisors, noted that plan sponsors have to have a high-deductible health plan (HDHP) in order to offer HSAs. He added that HSAs are valuable for highly compensated employees who need a way to save more on a tax-deferred basis than statutory limits on retirement plans will allow.

Dan Steele, SVP and head of retirement field distribution at BNY Mellon Retirement, believes the use of HDHPs will grow. “It is similar to the move from defined benefit plans to defined contribution plans,” he said. “Employers want to lower their health care budget, so more will move to HDHPs and HSAs.”

Auda said it is a new idea, but he believes it will take off as more focus is being given to total financial wellness. “Advisers need to get into the market and offer education before competitors do. Get in the game now,” he said.

“You position yourself as a retirement expert, and you agree that health care expenses will be employees’ biggest cost in retirement. Do you have a solution to address this?” Steele queried.

The Importance of Succession Planning
Most adviser firms wait until something happens to determine business succession, said Jason Chepenik, managing partner at Chepenik Financial. “There’s no time to plan, and shareholders have to come up with money quickly,” he said.

“For advisers, their practice is their biggest asset, so it is important to have a succession plan already in place,” added Troy Hammond, president and CEO of Pensionmark.

Chepenik, whose practice is a family office, said there are two key things to have in place. One is a legal document that spells out what happens in the case of an adviser’s death or disability and what kind of multiple would be used to buy out that adviser. The second is life insurance.

He explained that partners should own life insurance on each other that will provide money to buy the shares of the other partners. They can cross purchase insurance or the insurance company can own the shares, and the shares of the adviser who dies evaporates. However, in the second scenario, the survivors get the original cost basis of the shares, which would be more expensive.

Hammond, whose firm is a home office for advisers, said home offices already have a succession plan in place for their own advisers. But other adviser firms have asked it to be their succession plan. When someone retires, Pensionmark does due diligence to determine how much of the business is wealth management and how much is retirement plans, how much assets the adviser manages, the age of clients and their types and locations. He said the company will pay a higher multiple to Pensionmark offices and advisers, but a lower multiple to other firms.

As for cost, Chepenik said the cheapest way to fund succession upon the death of an adviser is with term life insurance, usually 10% to 20% of the value of the business. He said buy/sell disability insurance is expensive, but it depends on the age of the partner; cross purchasing is best.

Hammond said if an adviser retires, she can self-finance for the successor. The successor has a lower risk, but will pay a higher multiple. If the successor pays all up front, the multiple will be lower.

According to Hammond the multiple is one times gross value with death or disability if the successor has no relationship with the adviser, and it can be up to two or two and one-half times the gross value if the adviser sells her business and self-finances. “In some situations, though, the successor will be willing to pay a premium for the book of business,” he noted. Chepenik said with a family business, the multiples are half of that.