Making Strides

Plan sponsors of all sizes hire retirement plan advisers to guide them in their plan’s administration and to improve various aspects of the plan. While many advisers have a tremendous influence on the sponsors and plans they work with, research shows that, overall, advisers might not be improving plans as much as they intend.

The 2014 PLANADVISER Adviser Value Survey segments the annual PLANSPONSOR Defined Contribution (DC) Survey to compare plans that have advisers with plans that do not. The most recent survey, which evaluated 3,079 plans that use an adviser and 2,025 plans that do not, finds that those with the benefit of an adviser are better-designed, formally run, and carefully benchmarked and analyzed when measured against those that do not. Typically, they also offer more balanced asset-allocation choices in the investment menu. However, in few of these categories are plans with an adviser much better off than those without one; most statistical differences are merely a handful of percentage points—or fewer.

Plan Design

The survey comparison of plans suggests retirement plan advisers excel across the board at convincing their plan sponsor clients to adopt an outcome-oriented plan design. Automatic enrollment, which has proven time and again to significantly boost participation rates, is a practice at 41.7% of plans with an adviser and at 38.8% of plans without one. And auto-enrollment’s partner, automatic deferral-increases, is slightly more common among adviser plans (27.4%) than it is in plans lacking the guidance of these professionals (26.5%).

Retirement plan advisers are also more likely to convince their plan sponsor clients to offer a Roth option at their 401(k) or 403(b) plan: 54.3% of plans run by an adviser have these options, versus 49.4% of plans that are run independently.

Other plan design features that advisers bring to the table, although by slimmer percentage margins, are: a safe harbor provision, catch-up contributions for those 50 or older, and hardship withdrawals and loans.

Finally, plans with an adviser more often offer company matches: 69.9% of plans with an adviser have a company match, while 65.4% of plans without one do so. They are also more apt to make profit-sharing contributions (28.8% of plans with an adviser, 25.9% of plans without).

Formally Run

Plans guided by an adviser have more formal rules and follow a strict timetable, starting with a written investment policy statement (IPS)—in place at 71.8% of plans with an adviser versus at 60.3% of plans without one.

More than one-quarter (25.7%) of plans with an adviser have an investment committee composed of both internal personnel and external experts, but only 15.5% of plans without an adviser have such oversight. This may, however, indicate that the adviser sits on the investment committee at some plans.

The majority of plans that use an adviser review their investment options every quarter (40.8%) or biannually (17.5%), compared with plans that do not (32.2% and 15.0%, respectively). Plans with an adviser are also slightly more apt to review their total administrative costs and fees either every year or before two years have passed, and to review their defined contribution providers each year (31.0% of plans using an adviser, 27.8% of plans not).

Measures of Success

Retirement plans that employ an adviser are more heavily scrutinized than plans that do not. The success measures used at plans with an adviser include: participation rates (70.7% vs. 65.1%); the percentage of salary various employee segments defer (36.6% vs. 30.8%); the percentage of participants who maximize the company match (29.4% vs. 27.2%); external plan benchmarking data (29.3% vs. 20.7%); surveys of employee satisfaction (21.7% vs. 17.7%); “appropriate” asset allocations (17.0% vs. 13.2%); the offering of advice and/or seminars (11.6% vs. 9.5%); and the percentage of employees who increase their deferrals (10.0% vs. 8.0%).

While reviews of a participant’s income replacement ratio and projected monthly income in retirement are less common indicators of success, calculations of these figures are more frequently done by plans run by retirement advisers, in 6.9% and 4.9% of these plans, respectively.

Plans with an adviser at the helm have far more diversified investment lineups than those without this advantage. Most notably, there is a greater possibility plans with an adviser have either target-date funds (TDFs)—72.6% vs. 70.6%—or target-risk funds—38.8% vs. 34.0%—in their fund menu. A significant difference between plans guided by an adviser and those not lies in whether the plan offers custom target-date funds; 26.6% of plans with an adviser either have or are considering custom TDFs, compared with 19.7% of plans with no adviser.

Moving the Needle?

Surprisingly, however, when it comes to actual plan metrics, such as average and median balances, no appreciable difference exists between plans with an adviser and plans without one. In fact, plans with an adviser fare slightly worse than those lacking this professional guidance. Take the average participation rate, for instance. In plans with an adviser, it is 76.5%, but the participation rate of plans without an adviser stands at 77.2%. The average and median balances in plans with an adviser are $74,904 and $55,000, respectively, versus $77,947 and $58,000 in plans without. Average deferral rates are equal, at 6.1%.

These final statistics seem to indicate that advisers need to put far more muscle into moving the needle for participants: If plan sponsors were to see these figures, they would probably question their adviser’s true worth.

Art by Jillian Tamaki