Impressive Showing

At investment or plan committee meetings, when reviewing the retirement plan with sponsor clients, advisers have the full attention of those in attendance. Most of those meetings are spent discussing the plan and its participants—and sometimes even the investment committee.

How often, though, do those meetings discuss the plan adviser himself? Not as often as they should, say many experts. At least once a year, perhaps when conducting the plan review, an adviser should take that opportunity to detail the value he brings to the table, for instance in the context of changes that were made to the plan in the previous year. When going through the specifics of how the plan and the participants’ situations have improved over the past 12 months, it is vital for advisers to show plan sponsors how they drove those changes.

“The annual review is an excellent opportunity to state your value, to quantify it and get the acknowledgement from the client for the work and the value you bring,” says Jim Sampson, managing principal of Cornerstone Retirement in Warwick, Rhode Island. “Because sponsors are responsible for so much besides the 401(k) plan, it is very easy for them to be unaware of all of the work we do throughout the year to run their plan—from working with participants, to updating [the sponsors’] fiduciary responsibilities and investment platforms, to the ongoing training and education we have to do to keep up with the regulations.”

The fact of the matter is that plan sponsors do not fully grasp all the work advisers do, according to a recent Dalbar report, “How Retirement Advisors Really Add Value to 401(k) Plans.” Their duties extend far beyond selecting top-performing funds and enhancing returns, and “the critical role of the retirement adviser has not been understood,” the report says. “Providing the value of a secure retirement may appear on the surface to be a simple task. Experienced professionals recognize that this is not the case. Enhancing retirement security requires labor-intensive work for an employer and then for each employee.”

The Fund-amentals 
The “three F’s”—funds, fees and fiduciary—are a good place to start the review, sources note, with quantifying the funds perhaps being the simplest task. Advisers should begin to present their value proposition by taking the plan sponsor through the basics, starting with how they have monitored investments, made or suggested improvements to the lineup, and how their fund selections or recommendations have led to better performance, suggests Shelby George, senior vice president, advisor service at Manning & Napier in Rochester, New York.

However, “advisers should be cautioned against looking at funds like a horse race,” that is, in terms of performance alone, George says. “Instead, they need to explain how the fund selection is part of a fiduciary process. Advisers should demonstrate that they have selected funds with reasonable fees and that they looked at the demographics of the plan—i.e., participants’ individual needs—and then selected funds that met those needs. One of the trends we see in fiduciary practices is the need to look at a plan’s unique demographics as a window into finding out what is in the best interest of plan participants.”

Whatever his involvement, the adviser needs to note whether he acted as a 3(21) fiduciary, making investment recommendations, or a 3(38) fiduciary, taking on the responsibility of managing the investments.

Matt Smith, director of retirement sales and strategy at BMO Retirement Services in Milwaukee, agrees as to the value of process. “While advisers should make it clear to plan sponsors how their fund selection or recommendation has led to better performance, it is more important that they have a good process that is well-documented, because plan sponsors are held to a prudent standard.”

In line with this, demonstrating to sponsors how they monitor investments on an ongoing basis is also significant, especially in light of the Supreme Court decision in Tibble v. Edison, George says.

Advisers should also explain to sponsors the reasons behind their recommendation for the qualified default investment alternative (QDIA), George adds. “The selection of a default investment is a critical plan design decision where advisers can provide a lot of value,” she says.

The due diligence that an adviser took to keep fund and service provider fees low is another topic he should bring up in the annual plan review, George continues. Advisers can explain what steps they took, such as issuing a request for proposals (RFP) and/or benchmarking to help with plan sponsors’ “fiduciary responsibility to choose providers that have reasonable fees,” she says. “That doesn’t mean a responsibility to select the cheapest [option], but to ensure that the fees are reasonable and to undergo an assessment of what the plan is receiving for those fees and whether the fees are reasonable in light of the value of the service being provided.”

Advisers should also detail their ongoing service’s relationship to helping plan sponsors fulfill their fiduciary role. The Beacon Group of Companies in King of Prussia, Pennsylvania, which serves as a 3(38) fiduciary to its plan clients, uses the annual plan review to discuss what actions were taken in the past year to help meet a plan’s fiduciary responsibilities and why certain funds were selected, says Managing Partner Brian Menickella.

A good adviser can cite how he keeps abreast of regulatory developments at the Department of Labor (DOL) and new requirements for 401(k) plans from the Internal Revenue Service (IRS), as well as how he educates retirement plan committee members about these changes, says Clarence Kehoe, co-practice leader of Anchin, Block & Anchin LLP’s compensation and benefits services group in New York City.

Advisers should document decisions made by the retirement plan committee and draft an investment policy statement (IPS) for them, Kehoe suggests. Reminding the sponsor at the annual plan review of all of the fiduciary actions they took to protect the plan is essential, he says.

Plan Outcomes 
However, advisers’ responsibilities do not end there, says Harry Dalessio, head of sales and strategic relationships at Prudential Retirement in Hartford. “It is no longer just a rundown of how the funds have performed, making incremental plan design changes and discussing the three F’s,” he says. “Those are just table stakes. [Plan design] has become much more substantive and now includes optimiz[ation]” through automatic enrollment at rates higher than 3%, automatically escalating deferrals each year up to a 15% savings threshold or higher, re-enrolling participants and using a well-diversified fund as the QDIA, he says.

However, advisers still have their work cut out for them when it comes to convincing plan sponsors to implement automatic features—and to do so at meaningful rates. Just 40.0% of plans use automatic enrollment, only 11.9% re-enroll employees not currently in the plan, and 25.5% automatically escalate participants’ deferral rates each year, according to the 2014 PLANSPONSOR Defined Contribution (DC) Survey. For those that do auto-enroll, the most common default deferral rate is 3%, used by 43.4% of the sponsors surveyed.

An adviser can begin to convince sponsors to up the ante on these automatic features by giving them data on the “retirement readiness of their participants, and how he is driving a better return on investment of every dollar the plan sponsor spends,” Dalessio says. This can result in “better retention and less turnover in key jobs that are critically important to the success of that employer, and more employees on the path for a secure retirement.”

Discussing retirement readiness puts the adviser ”on the ground floor to drive further plan design change” and enables him to get the chief investment officer (CIO) more engaged in the retirement plan. The adviser is now making a case for how a successful retirement plan can improve the company’s bottom line, Dalessio says.

It is also important for the adviser to provide benchmark information at the annual review, Menickella says. The purpose: “to show the sponsor where its plan stands with respect to plans with similar demographics across the country, to show improvement in any of the areas that the sponsor said was a plan goal at the outset—be it participation or deferral rates, passing nondiscrimination testing, or lowering investment and provider fees.”

Showing the sponsor how on-track—or not—its participants are to retire comfortably, and how its plan benchmarks against those of its peers, gives an adviser the chance to talk about improving the plan and setting new targets for the next year.

Rita Fiumara, first vice president, wealth management, at UBS Financial Services Inc., in Chicago, says she takes this opportunity to show improvements in participation rates, deferral rates, retirement readiness and employer costs. “It is important to quantify your accomplishments over the past year,” she says. For her annual reviews, Fiumara has her recordkeepers issue participant reports that indicate the percentage of employees on track to replace 75% of their income in retirement.

After the Meltzer Group of Bethesda, Maryland, does its plan reviews, it equips its plan sponsor clients with “an annual audit email that documents all of the things we discuss in the annual review: compliance, plan design, investments, provider and adviser fee disclosure and employee education,” says Andrew Prevost, the company’s president. It is important to “quantify the services and outcomes that we achieved during the plan year,” he says. Meltzer accomplishes this by “continually encouraging our clients to adopt best practices—obviously ‘auto’ features, retroactive auto-enrollment, auto-escalation, profit-sharing or matching formulas, and additional savings plans for highly compensated employees [HCEs] such as nonqualified deferred compensation [NQDC] plans and cash balance plans.”

Participant Education and Advice 
Participants want holistic, personalized advice from their advisers and appear to be getting it, according to a recent survey by Hartford Funds. This would suggest that if advisers are not already offering advice, or at least education, they should do so or partner with service providers to make it available.

Sponsors, too, are increasingly seeking holistic financial wellness programs. Bank of America Merrill Lynch’s Workplace Benefits Report claims that the majority of companies (83%) feel responsible for their employees’ financial wellness. Seventy percent of sponsors offer tools about saving for retirement to their employees, and 64% provide information on planning for health care expenses. The number providing information on managing debt and budgeting has roughly doubled since 2013—from 22% and 21%, respectively, to 43% and 40% this year, the report says.

“Obviously, there are two ways to improve retirement readiness: through plan design and education,” Sampson says. “We at Cornerstone have been promoting financial wellness, and we have had great success with topics such as budgeting, saving, getting out of debt and Medicare. You need those boots on the ground to have one-on-one conversations with people [and] get them to take action.”

As a registered investment adviser (RIA), The Beacon Group provides both education and advice to participants, Menickella says. The firm has created Beacon University to offer a full suite of comprehensive financial planning modules that sponsors can make available to their participants, covering topics such as asset allocation, how credit cards work, 529 college savings plans, understanding risk tolerance and what a FICA [Federal Insurance Contributions Act] score is.

No matter what type of education is delivered, experts stress that advisers need to produce data on solutions they suggest. Show who is using them, how many participants take advantage of the offering, and what action steps the education and advice have resulted in—e.g., increased deferral rates or re-balanced participant portfolios.

Expanded Role 
“There is a big opportunity in the next several years for advisers to expand the conversation they are having and to greatly improve the outcomes of retirement plans,” Dalessio says, “to show how they are boosting participation rates and savings rates, and getting more participants into well-diversified portfolios. It needs to be a completely different conversation, focused on outcomes and getting every employee on the path for a secure retirement—a holistic employee benefit conversation.”

Because plan sponsors are becoming more attuned to better outcomes, as well as more receptive to automatic features and other best practices, Fiumara agrees that advisers should take a more all-inclusive approach to the retirement plans they serve and make more substantial plan design changes. However, recommending and helping to implement such options isn’t enough.

Focus on plan metrics, Sampson suggests, specifically how many people are on track to retire with an adequate income replacement ratio at age 65. “We have found that human resources [HR] wants to do right by people. They want their employees to be able to retire at the appropriate age, but it is the finance team who asks, ‘What is my return on investment?’”

The answer: “‘The cost of having an employee remain at your company beyond traditional retirement age is between $10,000 and $50,000 every year due to decreased productivity and increased health care costs,’” he says. Getting sponsors to understand that empowers retirement plan advisers to make the case for improvements.

Art by Chris Buzelli