2012 PLANADVISER National Conference

Keynote: Bob Doll 

Delivering the opening keynote, BlackRock Senior Adviser Bob Doll explained why he is bullish on U.S. stocks.

Even though the U.S. economy will continue to “muddle through” as it grapples with multiple headwinds that trace back to massive debt deleveraging, “corporate America is delivering the goods, i.e., strong earnings,” Doll said.

According to Doll, advisers can form their “macro perspective for portfolio construction, investment management and asset allocation,” based on one key trend that will dominate the markets and the economy for the foreseeable future: The post-credit-bust world. “As it takes years for the bubble to build, it takes years to repair.

“Corporate America ex-financials started deleveraging before the bubble. Companies are in the best condition since the 1950s,” Doll said. “After three years of deleveraging, consumers are making great progress on interest expense as a percentage of income. Let’s hope the government starts deleveraging someday.”

Amid the ongoing economic uncertainty and talk of a “fiscal cliff” in the U.S., central banks’ monetary policy is, globally, creating a “sweet spot” for stocks, he maintained. “There’s a monetary party going on on this planet,” he said. “Central banks will do whatever it takes; England, China, Japan, Brazil and the European Central Bank are all trying to reflate. That is when stock markets do their best, and even when their economies get there, their markets all continue to do fine. This is lasting several years, supporting fundamentals for economic growth and earnings growth. Even with sentiment for cash and fixed income versus stocks at the extremes, this is the sweet spot.”

Money Talks 

Pricing raises myriad issues, including what type of compensation model to use, what services to factor in and whether to charge different fees for similarly sized plans.

Asked how they are most commonly paid for qualified plan business, the majority of panelists (59%) said they base fees on asset size. Nearly one-quarter (23%) are com­mission-based, and 14% use a hard-dollar, or flat, fee, regardless of asset size. Just 4% are Employee Retirement Income Security Act (ERISA) budget or ERISA reimbursable, and 1% said fees are per participant.

Edward O’Connor, managing director at Morgan Stanley Wealth Management, advises against walking into a first meeting with the range of fees from benchmarking. “It’s human nature to want the smaller number,” he pointed out.

“We try to make benchmarking about the services we are delivering and how we are delivering [them]—not the fees themselves,” said Rick Shoff, managing director of the Advise or Support Group at CAPTRUST Financial Advisors.

While most attendees (72%) had not changed fee formulas in the last 12 months, 29% said they expected some change in the next 12. Nearly three-quarters of those surveyed (74%) expect fees to face some compression. Most respondents (59%) pointed to new regulations, and 15% thought smaller firms willing to aggressively price new business could be a cause. Another 15% felt larger firms might be willing to aggressively price retirement advisory services as an entry to other business opportunities, which could have an effect. Very few (3%) thought the recession was a factor.

A minimum or a range is a good idea, according to Bruce D. Harrington, vice president of Sales and Business Development, John Hancock Financial Network. “Advisers don’t like to walk away from business, but it can be a race to the bottom,” he said.

Melissa Cowan, executive director of the DC [Defined Contribution] Advisory program at UBS Financial Services Inc., added that it can help to scout the possibility in advance. That way, she said, “you can walk away if someone doesn’t meet your number.” UBS’ business is about half retail and half institutional, according to Cowan. “I definitely think we [established] a minimum fee a few years ago, so we didn’t have these really small contracts coming through.”

A hard-dollar cap can be put into a contract, Cowan noted. “I encourage people to think about how much time they’re going to spend on a plan. Maybe you can’t do education because it won’t be profitable enough,” she said.

Other challenges of moving to a hard-dollar model may be psychological. The asset-based fee provides a comfort zone, and it’s more transparent, said O’Connor. “Twenty-five basis points just sounds a lot smaller than $25,000.”

To demonstrate their worth, Cowan recommended that advisers mentally walk through what they do every day that is of value to clients.

O’Connor counseled: “Convey what you are bringing to the table.” Most advisers provide more than simple advisory services. “You’re actually a consultant,” he said. “You’re an outsourced government relations department, because you’ll hear government information at a conference and bring it back to your client.”

The Politics of Retirement 

The government has worked to foster retirement readiness, but other agendas may get in the way.

The middle class has taken a hit from the recession, and the least-understood repercussion of this has been the blow to retirement savings, according to Marcia S. Wagner, principal at The Wagner Law Group. “Each leg of the three-legged stool is wobbly,” she said, referring to the three sources of retirement income for Americans: Social Security, employer-sponsored retirement plans and personal savings.

While lawmakers have attempted to solve the retirement crisis with legislation and proposals to increase savings, their efforts to solve the nation’s budget crisis through tax reform threaten to undo it all, Wagner contended.

She said that the Pension Protection Act (PPA) of 2006 helped to increase savings by giving statutory cover to plan sponsors who adopt automatic enrollment and automatic escalation, which led to plan sponsor and adviser initiatives to re-enroll and/or reallocate all employees. Automatic individual retirement accounts (IRAs) have also gained bipartisan support from lawmakers, potentially increasing savings for employees of the smallest employers, she said.

Regulations concerning fee disclosure and participant advice, as well as the impending redefinition of “fiduciary” coming from the Department of Labor (DOL), are designed to put downward pressure on fees and to create an interest in more level fee arrangements, which will help investment returns, Wagner said.

The recent Internal Revenue Service (IRS) exemption from onerous death benefit rules for longevity annuities in defined contribution plans as well as attempts to relax required minimum distribution (RMD) rules are government efforts that would facilitate decumulation planning, she said.

However, when Congress considers tax reform to help lower the nation’s debt, retirement plans also enter the discussion, and not in a good way. According to Wagner, in the government’s view, favorable tax treatment for retirement plans will result in $361 billion in foregone revenue from 2011 to 2015. “Plan limitations can, have and will change, depending on what society needs,” Wagner warned. “And they can be lowered to reduce the national debt.”

What’s Happening at the DOL? 

Brokerage windows should not be used to sidestep fee disclosure.

“We don’t like the idea that people might be using brokerage windows as a way to evade the rule,” said Michael Davis, deputy assistant secretary for the DOL. Davis cautioned those who may be advising clients to add brokerage windows to retirement plans in order to avoid having designated investment alternatives (DIAs) and thus avoid fee disclosure.

The DOL’s Employee Benefits Security Administration (EBSA)-issued guidance appears to be a warning shot for plans trying to do just that. Field Assistance Bulletin (FAB) No. 2012-02, written in question-and-answer format, aimed to clarify the obligations of plan administrators to improve transparency of fees and expenses to employees with 401(k)-type retirement plans.

While the revised FAB—FAB No. 2012-02R, released in July—does not prohibit brokerage window-only plans, Davis stressed that having no DIAs raises concerns. “We think it is better to have designated a suite of options,” he said.

Davis emphasized “good faith” compliance, saying that although both the 404(a)(5) and 408(b)(2) disclosure deadlines have passed, the DOL understands that new rules take some adjusting. “If people are trying to comply, we certainly take that into consideration.”

Regarding 404(a)(5), Davis said the DOL is open to feedback about whether participants understand the disclosure information on their retirement plan statements. “Policy objective was to help people make better decisions, and if 404(a)(5) isn’t doing that, we will absolutely look at that.”

As to the redefinition of “fiduciary,” Davis said: “[We knew] this was going to be a very engaged conversation and a very engaged debate.” The DOL received comments that are helping to shape the redrafting of the fiduciary definition. “We think the rule is better as a result of this process, but it’s not quite ready,” he said.

The Value of an Adviser 

Plans that have an adviser implement more design features.

Quinn Keeler, senior vice president of Research and Surveys at Asset International, presented findings of PLANSPONSOR’s Adviser Value Survey, which showed that plans with advisers have more frequent evaluations of plan investment options.

Keeler said plans with advisers are more goal-oriented—they use success measures more than do plans without advisers. Plan sponsors responding to the survey also reported having great confidence in their advisers.

Scott Buffington, national sales manager at MassMutual Retirement Services, said it is important for advisers to differentiate themselves from their competition. “You may know your value proposition, but are you effectively conveying that?” he asked.

Advisers should talk about something besides funds, fees and fiduciary responsibilities, Buffington added, such as participant outcomes and how they are measured. Advisers lacking the means to do so should hold providers accountable to do it for them. Buffington cited showing the difference in participants’ projected retirement income after one year of adviser-driven education as an example.

Steff C. Chalk, CEO of Fiduciary Consulting and Governance Group, suggested advisers focus on how to improve their client’s plan, determine what levers of change they will use and convey that to their client. For example, an adviser may use education and re-enrollment to increase participation. Advisers should measure their results and communicate that to clients.

Keeler suggested advisers dig down even deeper—e.g., by showing that they not only increased participation but did so for the lowest-income participants.

Buffington recommended that, when prospecting, advisers tell why they are in the business, saying, “I’m about improving plans,” or “I’m about helping participants retire.” Advisers should have a case study showing how they improved plan processes for a plan sponsor or how participants were better off because of what the adviser did.

Chalk said if advisers have a process for examining plan health and fixing issues, they should communicate that in their pitch and use some of the positive feedback they have received from clients to confirm their reputation.

The Future for Fiduciary Advisers 

The Department of Labor reproposal of the definition of fiduciary is another indication that fiduciary responsibilities are increasing, and broker/dealers (B/Ds) in particular could be affected.

The DOL’s proposal, if finalized, will expand the definition of fiduciary advice and recognize many service providers under current practices as fiduciary investment advisers. Following comments received after its initial proposal last year, the DOL’s Employee Benefits Security Administration withdrew its proposal from 2010 and announced it would solicit more information before creating a new one.

Fiduciary issues have gained more attention because of the 408(b)(2) fee disclosure regulation that required disclosure of both fiduciary status and compensation; Securities and Exchange Commission (SEC) activity for the Dodd-Frank fiduciary provision; and the Financial Industry Regulatory Authority (FINRA) “guidance” about best interests of investors.

Possible changes to the DOL’s reproposed regulation involve IRAs, reaffirming prior guidance, “individualized” advice, arm’s-length commercial transactions and brokerage commissions. Fred Reish, partner and chairman of the Financial Services ERISA team at Drinker Biddle & Reath LLP, predicts the DOL’s final regulation will say that those who give individualized advice are fiduciaries. In addition, he expects the final rule will have exemptions from expanding fiduciary liability for companies that sell and service IRAs but said he will not be surprised if the DOL expands examples of prohibited transactions for IRAs. Reish also said the DOL might make it clear that brokerage commissions are prohibited transactions. “That’s an odd one because brokerage commissions have never been prohibited.”

In addition, Reish stressed, if offering individualized advice continues to qualify an entity as a fiduciary, it is difficult to create an asset allocation model without assuming fiduciary status.

Investment policy statements (IPSs) are another issue, Reish said, as he does not think they can be written without “recommendations,” which would fall under the proposed fiduciary definition. Upon an investigation, the DOL would first ask the broker/dealer if it makes recommendations for plans, he said.

Creating Better Savers 

Participants have expressed anxiety over retirement readiness, said Joe Connell, managing director of Sheridan Road Financial.

Stuart L. Ritter, vice president and certified financial planner at T. Rowe Price Retirement Plan Services Inc., was critical of the standard 3% deferral. The goal should be 15%, he said, adding that “saving 3% for retirement is like going to the gym for six minutes.

“We don’t design plans,” Ritter said. “We design outcomes: more people saving more money and being more successful.”

Participant action and plan design are the two ways to create change, said Kris Gates, assistant vice president of marketing communications at MassMutual Retirement Services. If someone has a dollar of income, he can spend it or save it. Examining the consumer goods industry to see how they get people to spend money can yield some insight into how to influence behavior. “We should use the same tactics to get them to save,” Gates said.

Retirement Income—The Next Generation 

Discussions about retirement income offer a chance to get plan sponsors and participants thinking about a holistic retirement solution, according to Ralph Ferraro, executive vice president and head of product development – corporate management at ING U.S. Retirement.

“Participants just can’t envision 20 years or more from now,” said Bill Marshall, vice president and senior product director of AllianceBernstein Defined Contribution Investments. To address the retirement savings problem, retirement income solutions need to be in-plan default options, Marshall said.

AllianceBernstein developed an integrated solution to help participants understand longevity risk and how to manage it. They partnered with United Technologies, the first company to use a guaranteed income product as its retirement plan default investment.

Ferraro said ING offers a similar product that looks like a regular target-date fund for the youngest participants but, at 17 years from retirement, starts methodically and automatically moving participants’ assets into guaranteed products. Five years out from retirement, 100% of assets are in guaranteed products.

Marshall contended that income solutions will drive participants to make better savings and investment decisions because they give them a tangible objective. Ferraro added that an income projection is good feedback for participants; they can see that, as they save more, they will have more in retirement. They should be told they need to insure their savings, just as they do other assets such as their home or car.

Jon L. Prescott, president of CPI Qualified Plan Consultants, said a gap analysis statement for participants, with a summary for employers, is vital to an adviser’s practice.

Making Sense of MEPs 

Multiple-employer plans (MEPs) do not absolve plan sponsors from fiduciary responsibility, despite what marketing campaigns may advertise.

“Before the end of May, we lived in a world where there was a lot of marketing,” said David Levine, principal at Groom Law Group, Chartered. “It’s pretty clear that [this] didn’t sit well with the DOL.”

In May, the DOL issued Advisory Opinion 2012-04A, which addressed whether a multiple employer plan open to unrelated employers constitutes a single employee pension benefit plan. The DOL said its consistent view has been that, where several unrelated employers merely execute identically worded trust agreements or similar documents as a means to fund or provide benefits, and there is no genuine organizational relationship between the employers, no employer group or association exists for purposes of ERISA Section 3(5).

This means that each employer that has adopted an open MEP will be treated as if it has its own stand-alone plan and disclosure requirements—such as Form 5500—and plan audits that have been done collectively until now must be performed separately going forward.

Marketing materials that claimed plan sponsors could reduce or completely eliminate their fiduciary responsibilities were a “trigger point” for the DOL to issue its advisory, said Geoffrey Strunk, senior vice president and general counsel at ExpertPlan Consulting Services. “The idea that you can delegate [fiduciary responsibility] all away, I think, is kind of a farce.”

Plan sponsors can still offer open MEPs, but they have lost many of the advantages after the DOL’s advisory guidance, Strunk said.

Target-Date Funds 

Working with plans that offer target-date funds (TDFs) presents opportunities for advisers.

Tom Skrobe, managing director and head of defined contribution distribution at BlackRock, observed that the role of an adviser for plans with TDFs is very important because the analysis and due diligence for the funds is different than for mutual funds. Advisers can help plan sponsors decide which approach they want to use: They could start with a simple, off-the-shelf product, but that may change as the plan evolves.

Joseph J. Masterson, senior vice president and chief sales and marketing officer at Diversified, said advisers can offer analysis about whether a plan’s target-date fund solution is best for participant demographics. Advisers can also perform a due diligence search.

According to Harold Bjornson, executive director of Defined Contribution Investment Solutions at J.P. Morgan, since target-date funds were endorsed by the DOL in 2006 and widely adopted in plans by 2008, plan sponsors are rethinking their initial decisions about them. Sponsors need advisers for benchmarking and understanding their TDFs’ fee structures.

There are considerations for advising funds about the use of custom target-date funds. Bjornson said mega plans may want to use them, but issues to consider are higher pricing, the fact that mixing separate accounts with other funds is hard to unitize and the question as to whether creating a custom solution involves additional fiduciary responsibility. 

Drafting Disclosures 

Plan sponsors have a fiduciary obligation to avoid prohibited transactions or overpaying for fees, which is where 408(b)(2) fee disclosure regulation can help.

Now that the 408(b)(2) deadline has passed, how can advisers help sponsors checklist the process? To begin, plan sponsors who did not receive 408(b)(2) statements from service providers—or did not receive adequate information on those statements—should send a notification letter to the provider, said Al Chingren, vice president of Value-Added Sales for American Century Investments.

If the provider fails to send this information to the plan sponsor, the sponsor must report this to the DOL, stressed David Kaleda, partner at Alston & Bird LLP. Once the sponsor receives the disclosure, it must be reviewed.

Panelists acknowledged that many gray areas exist when it comes to disclosure. DOL guidance is still needed, Kaleda said. For example, plan sponsors must determine if ERISA reimbursement accounts and marketing allowances are considered indirect compensation and whether they must, therefore, be disclosed under 408(b)(2).

When reviewing disclosure statements, plan sponsors must determine if fees are reasonable and document the entire process, said Vincent Morris, president of Bukaty Companies. One way to compare costs is through benchmarking reports.

What’s the Right Standard? 

Benchmarking a retirement plan includes performing analyses of providers, investments and the plan itself.

But it all boils down to participant readiness, so advisers must give plan sponsors easy-to-understand information, said Dan Peluse, corporate retirement director at Morgan Stanley.

Chad Larsen, president of Moreton Retirement Partners, said success is measured not only by participation and deferral rates but by whether employees will be able to retire. Advisers should educate sponsors on how much it costs companies when participants cannot do so.

According to Peluse, many tools measuring participant readiness neglect to factor in participants’ outside assets and Social Security, so the industry needs more accurate information.

Larsen said that other data available to use for benchmarking may be incomplete. For example, automatic enrollment is unhelpful if participants cash out their balances when they leave their companies. Sponsors need to know how many participants cash out at retirement, in order to change participant behavior.

According to Joseph P. Frustaglio, vice president of retirement plan sales and national sales manager at Nationwide, plan sponsors want to know how their plan is doing in relation to their peers’, because these are the companies they compete with for talent. Advisers can differentiate themselves by finding this information, he said.

Larsen pointed out that the most comprehensive database of this information is the annual PLANSPONSOR DC Survey, and the Profit Sharing Council of America (PSCA) also provides some information. Advisers should look for data by industry and plan type. 

Stability Wanted 

Stable value funds are a little-known option in the 401(k) industry. “[Stable value funds are] a low-risk investment option that appeals to the more conservative investor, as well as those who want to optimize their asset allocation mix,” said Aruna Hobbs, managing director and head of stable value investments at New York Life Investments. “It’s a very popular investment class. It represents about 175,000 plans and millions of participants.”

According to Hobbs, there are three types of stable value plans: banker-invested collective investment trusts (CITs); pooled funds whose assets are combined from multiple unrelated plans that typically have a stable value manager and are backed by a contract; full-service, or ­investment-only, insurance funds, which are invested in a strong insurance company; and single plans. Each is backed by a stable value contract, Hobbs said.

Jeff Andrews, president and CEO of Harmon Street Advisors Inc., sees stable value funds as a good, short-term alternative to money market funds and an option that could eliminate barriers to investment entry, due to their simplicity.

Because of the downturns seen in 2008, Richard G. Simpson, associate client adviser at The Corpening Group, Deutsche Bank Alex Brown, said he views stable value funds as a “safe” alternative for investors.

The different types of stable value funds all have their pros and cons, said Henry Kao, senior vice president and stable value account manager at PIMCO. With general account products, one provider offers the guarantee as well as the underlying investment management. Many come with minimum rate guarantee, at least for a period of time. However, the assets are technically owned by the trust, so if there were to be a downturn with the issuer, the risk is side by side with the policyholder.

A separate account product is similar to a general account product, Kao said. In this option, though, the general account is divided, leaving some assets backing the liability of the stable value fund, and those can’t be touched by other creditors.

A bank collective fund has a trustee who acts as the fiduciary for all investors. The fund is owned by the plans invested in the trust; it does not offer a guarantee rate; and, Kao said, it most likely will not perform as well, although some people may view it as offering a better credit profile.

According to Hobbs, there is “a need and use for each” of these types of funds. “They’re diversified products; they deliver the same principal benefits; there are varying levels of guarantees in each; and there are varying levels of transparency.”

Simpson added that, while offering these plans is a good way to add value as an adviser, you must understand what you are offering. “Get help if you need to from an ERISA attorney or someone like that to review these documents before signatures are made.” He encouraged advisers to “lift the hood and look into them.”

Andrews agreed and also suggested sitting down and having a conversation with investment committees to discuss how the product is constructed, what the potential pitfalls are, where your retirement plan program stands and what it may look like in a rising interest rate environment.

Looking at the issue of lockups and redemption risks, Simpson warned against several potential problems, not least of which is a hold on the money, which typically runs from 12 to 24 months.

Marketing Messages 

More than just cold calling, marketing and prospecting require defining your brand and your value proposition, said Jason Chepenik, managing partner of Chepenik Financial.

“Everyone has a brand,” said Ty Parrish, director of the Key Accounts Team at RidgeWorth Investments. But the crucial difference is keeping on top of your message. If you fail to take control of your brand and distinguish yourself, he cautioned, you will be judged on price.

Jonathon Schultheiss, retirement plan adviser at Oak Ridge Wealth Management, pointed out that conversations might extend to human resources, health care benefits or something else of interest to the sponsor.

“Deliver your message,” said Chepenik, “but get in the door.”

“We use lead generation services to keep prospects coming in the door,” added Michael Kane, managing director of Plan Sponsor Consultants.

One of Kane’s firm’s marketing tactics has been to write articles, then post them on the firm’s website and have them published whenever possible. The group also holds regularly scheduled “Breakfasts with Benefits” with ERISA attorneys. “You have to develop yourself as a resource through these people—accountants and attorneys—so they will want to recommend you,” Kane said.

Chepenik called social media extremely valuable, particularly LinkedIn, which he called “one of the most powerful things out there.”

The Low-Cost 401(k) 

Advisers discussed low-cost 401(k)s and whether or not all-index exchange-traded fund (ETF) plans are a viable solution.

According to Mike Narkoff, senior vice president of sales at Ascensus, no massive rush into low-cost plans has occurred post-fee-disclosure, and employers still have questions. “There’s a big difference between fee disclosure and fee awareness versus the second point, which is, ‘As an employer how I, in turn, choose to pay for the cost of the services,’” Narkoff said.

While all-ETF menus are rare, there are some all-index menus coming from fiduciary advisers who want revenue-sharing eliminated. According to Skip Schweiss, president of TD Ameritrade Trust Company, a shift to low-cost solutions may be inevitable, a belief he shares with William McClain, director at 401k Advisors LLC. “The adviser community really needs to educate both the plan sponsor and the plan participant more on index funds and really low-cost investing,” McClain said.

Advisers need to talk to plan sponsors about different options and be sure to include low-cost solutions in their conversation. “It’s not selling a specific product. It’s not selling a certain fee,” said Joseph Lee, head of Defined Contribution Adviser-Sold Distribution at BlackRock .

When T. Henry Yoshida, principal at Maresh Yoshida 401k Group, asked if 401(k) participants are getting more for their money today than in the past, Schweiss responded that, while participants are getting lower-cost investments, they end up being responsible for funding more costs.

Narkoff said that, with the newest low-cost plans, advisers will be able to present sponsors and participants with simpler pricing schedules.

Participant Education and Advice 

Sponsors and participants may be ready for the concept of “financial wellness.”

At a time when people have become hyperconscious of managing their budgets and reducing their debt, this may be the perfect time to offer 401(k) plan participants education and access to advice—all in the name of “financial wellness,” said William Chetney, executive vice president of LPL Retirement Partners. “Just as health wellness began to catch on with plan sponsors in recent years, financial wellness is beginning to create a lot of resonance,” he said.

The best way to convince a plan sponsor to agree to offer participants advice is to let him know it is available, said Richard Schwamb, premier retirement benefits adviser at Merrill Lynch. “We don’t charge anything for advice access. You really need to talk to the plan sponsor. Some of them don’t want you prospecting their participants for other financial issues. So, we do a soft sell and ask the plan sponsor what they want.”

Otto G. Feddern, president and chief compliance officer at Feddern Financial Consulting Group, takes a more dogmatic approach. “We tell the plan sponsor that this is what we do. We offer individual advice that every participant has access to, through our website, on a daily basis.”

Education and advice have failed to prompt participants to make the right investment choices and save enough, but auto-enrollment, auto-escalation, scaled-down investment platforms and target-date funds have done a tremendous job at picking up the slack, Schwamb and Chetney agreed.

Making participants realize the seriousness of saving for a dignified retirement outcome is another successful approach to education, Schwamb said. “I’m honest with clients about what they are going to face in retirement,” he said. “I started doing that five or six years ago, and, at the end of the story, you tell them what they have to do.”

Achieving higher savings rates trumps all, Chetney said, “If I can get people to put in 10% rather than 6%, that is the win. That kind of relationship develops over time, over personal relationships.” 

Quarterly Review 

A good quarterly review starts with an effective meeting agenda.

This should include legislative and economic updates, investment and plan administration reviews and a plan road map. The quarterly meeting is a great time to discuss these issues in depth, said Greg Cimmino, managing director at Institutional Investment Consulting.

As a topic for the legislative updates this year, it is no surprise that panelists mentioned 408(b)(2) and 4­04(a)(5) fee disclosure regulations, which went into effect July 1 and August 30, respectively. The DOL website remains a good source for reading about these updates, Cimmino said.

An economic update should involve looking at indexes with the client and analyzing what has been driving the market during this period, said Sean Laird, senior vice president of Institutional Sales at Wells Fargo Advantage Funds. Jobs and housing remain the top two issues for the economy, he said.

Plan administration should also be reviewed during the quarterly meeting. Benchmarking against similar plans and reviewing the plan design is a good idea, said Paul Temple, vice president and national sales manager for Defined Contribution Investment Only (DCIO) at OppenheimerFunds.

“I think a quarterly review is a good time to look at the service agreement,” Temple said.

Quarterly reviews are also a good time for plan advisers to educate sponsors on rate of return, Temple added.

Advising 403(b) Plans 

403(b) plans offer advisers access to a large amount of assets.

Do not assume, just because a 403(b) serves public education, nonprofits, and hospital and health care cooperatives, that assets are minimal. These types of retirement plans often have substantial pools of assets, said Mary Ellen Mullen, principal with Bridgebay Consulting. She noted that schoolteachers could be retiring with large estates; there is opportunity to capture rollovers from high-salaried executives; and these entities also have other plans, such as 457s, 401(a)s and endowments.

Advisers to 403(b) plans have a great opportunity to work with these participants at the point of their retirement, said David Ray, managing director of strategic sales at TIAA-CREF. “With fee compression, most advisers will make money performing due diligence in postretirement products,” Ray said.

For their part, 403(b) plan sponsors are an excellent market to target—if advisers have done their homework and come well-equipped—due to the group’s “herd mentality,” inertia and need for better understanding of how their plans work, Ray said. Once one 403(b) plan selects a plan provider, its counterparts tend to make the same selection without doing extensive research, both Ray and Mullen said.

Get to know these “peer networks,” Ray advised. The key to breaking into this market, he said, is to “look at providers in the market and get to know their business, because 403(b) sponsors move in herds and put too much faith in the first service provider that comes in. Having this k­nowledge—to know this space—is so important going in.”

Ray also cautioned attendees “not to underestimate the amount of time it takes to serve these plans. Fees are similar to 401(k)s, but it takes twice the time to service a 403(b) plan. Usually, it’s more time for less pay—but you need to invest the time to understand the environment and how contracts work and are priced. Understand the cost complexities of every provider. Usually, it’s more expensive [to serve 403(b)s] because information has to be delivered face-to-face.”

The real challenge for advisers serving 403(b) plans is their complexity. “There are potential land mines,” said Mullen. “There are a labyrinth of rules and laws. There are even different types of government plans, which may fall under state or federal laws, and church plans, which are exempt from ERISA .”

Be selective in what partner you select, Mullen added. “Payroll providers may not be equipped for 403(b) features, such as converting to a Roth.”

Team Building 

What makes a successful advisory team and how can you build and maintain a healthy, cohesive group?

“We consult with advisers on best practices,” said Anders Smith, senior vice president and national sales manager of DCIO and Strategic Platforms at Nuveen Investments.

According to Nuveen research, 74% of retirement plan advisory practices work in teams, Smith said. Teams provide better client service and are more effective at meeting the needs of plan sponsors and participants. Benefits include increased productivity, creativity, efficiency and clearer work objectives.

Teams also provide better communications, a motivated staff, higher levels of job satisfaction, less stress and more business, Smith said.

While most teams have some set players, Charles Williams, managing director at Sheridan Road Financial, said his firm aims to customize for the client, based on its need. “A startup might look very different from a more established plan,” he said. Generally there’s a marketing function as well as an investment officer.

Team members’ personalities are a vital consideration when building the group, said Bruce D. Harrington, vice president of Sales and Business Development at John Hancock Financial Network. He suggested using resources such as the Myers-Briggs Type Indicator, which can help specify personality characteristics.

When examining personnel as potential team members, Williams said he asks, “Are they bringing something we don’t have, something that’s unique?” Sometimes a staffer is uniquely good at education or some other part of plan service. “We look at how a personality fits in with what we have,” he said.

One of the biggest challenges is designing an appropriate compensation structure that works for everyone and serves to motivate, said Steve Wylam, partner at The 401(k) Team @CAMI.

Harrington described a structure with a lead adviser who primarily generates revenue and everyone underneath the lead is on salary.

“I have found you have to back a new hire with 250K of new revenue,” Wylam said.

Micro Matters 

Growth is ripe in the micro market—between $1 million and $5 million in retirement plan assets—in part because of the prospecting­ opportunity resulting from fee ­disclosure.

The market itself is not necessarily growing, but the opportunity within it is, because plan sponsors and participants need help understanding 408(b)(2) fee disclosure, said Jim Sampson, managing principal at Cornerstone Retirement Advisors.

“[Fee disclosure] has opened a lot of eyes and raised a lot of questions,” he said, adding that it provides a big opportunity for advisers in the micro market to benchmark prospective clients’ plans. His company has added more than 20 plans this year, many from benchmarking.

Timothy Rice, president of Lakeside Wealth Management Group, suggested calling prospective clients and asking if they have reviewed their 408(b)(2) disclosures. If they have not, offer to review the statement with them, he said.

Basic benchmarking is almost a requirement in today’s industry, for plan fiduciaries to determine if fees are reasonable, said Sampson.

In addition to explaining and benchmarking fees, advisers in the micro market can bring value to clients through education.

Because the small-plan market is relationship-driven, Sampson said he thinks clients expect hands-on education. In his meetings, he said, he spends 90% to 95% of the time focusing on the impact of savings and the remainder on investments, which, he said, participants do not care about. “They want you to tell them which [funds] to pick,” he said.

Sampson and Rice offered additional suggestions for advisers trying to break into the micro market:

• Delegate. Enlist a junior adviser to create quarterly reviews so that you have more time to prospect new business;

• Price yourself fairly. The cheapest is not necessarily the best. If you can demonstrate your process and show that your participant outcomes are going to be better in the long run, then you have pricing power; and

• Use repeatable systems. Employ a tool suite that makes processes more seamless. Rice estimates that 80% or more of his plans have identical fund lineups.

Cross Selling—Traps for the Unwary 

It is possible to broaden your practice successfully without running afoul of the rules, said Roberta Ufford, principal at Groom Law Group.

Plan sponsors usually accept fiduciary roles when they act as plan administrator or “named fiduciary” for investments. But “settler” activities are not fiduciary activities. An adviser may be a fiduciary when he is a 3(38) or 3(21) adviser. Fiduciaries are defined functionally by their professional actions. A person is a fiduciary if he:

• Exercises discretionary authority or control in the management of a plan;

• Exercises authority or control concerning the management of plan assets;

• Has discretionary authority or responsibility for plan administration; and/or

• Renders investment advice in return for a fee.

Under ERISA rules, plans are prohibited from receiving services and paying fees to an interested party unless certain conditions are met. The services must be necessary and appropriate. Plans must be deemed reasonable. In an arrangement that is reasonable under the terms of ERISA Section 408(b)(2), the provider must deliver fee disclosures and the arrangement must be terminable on reasonably short notice.

Self-interest is one of the pitfalls to watch for, according to Ufford. Provisions under ERISA 406(b) prohibit plan fiduciaries from causing a plan to engage in a transaction if it might benefit the fiduciary or someone in whom the fiduciary has an interest. Another prohibition would be if the fiduciary also acts on behalf of someone with interests in opposition to those of the plan or if the fiduciary would receive a kickback or other benefit from a third party.

The bottom line, Ufford said, is that the sponsor has to be able to benchmark and show that expenses benefit the plan or are necessary to its administration. Ideally, service providers and sponsors will not link plan and nonplan services.

Partnering with TPAs 

Working with third-party administrators (TPAs) gives advisers someone to bounce ideas off and help empower plan sponsors, according to Keith J. Gredys, CEO of Kidder Benefit Consultants and Kidder Advisers.

Kevin Seimet, sales relationship manager at Nationwide, cited several good reasons for advisers to partner with TPAs:

• They have technical expertise and know the business inside out, so they can keep plans qualified;

• They can help with plan design—a good TPA will ask questions and make plan suggestions;

• They offer day-to-day service support that helps plans administer withdrawals and loans and that helps with plan audits;

• They are a good source of leads or referrals for advisers; and

• Their local presence and experience with sponsor handholding are good selling points for advisers.

Jeff Schreiber, vice president of TPA business development at Principal Financial Group, added that TPAs’ experience is something advisers can leverage because TPAs have probably seen any problem sponsors may encounter.

Sean Deviney, retirement plans specialist at Provenance Wealth Advisors, said advisers can differentiate themselves by being able to offer or suggest the best plan design for sponsors, with help from TPAs.

Next Generation of Target-Date Funds

Further diversification, risk management and customization are the future for target-date funds.

To mitigate the volatility of the equity markets and make good on their promise to prepare investors for retirement, target-date funds will become more diversified and use tools to manage risk, said Adam McInroy, vice president at Goldman Sachs Asset Management (GSAM), Global Portfolio Solutions.

Customization is also on the horizon, panelists said. “Ten to 15 years ago, the first target-date funds were all proprietary, and there was no selection,” observed Jeb Graham, partner in CAPTRUST Advisors. “Today, providers offer multiple platforms, including custom target-date funds for investments and glide path selection.”

Graham foresees custom target-date funds of the future using more options, alternatives and hedging strategies, not just to diversify the portfolio but also to reduce risk.

Glenn Dial, managing director and head of U.S. Retirement Distribution at Allianz Global Investors Distributors LLC, characterized these developments—not least of which is risk management—as “the DB-ization [or adoption of defined benefit practices] of the target-date world.” Dial said Allianz has developed a benchmarking methodology to analyze risk exposure and equity weighting of TDFs.

“Every target-date fund should have a publicly available risk benchmark, and we believe every target-date fund manager should have a benchmark in terms of standard deviation,” Dial said, noting that the available tools for measuring stock and bond mutual funds were not designed for target-dates, which are funds-of-funds. Risk management is now paramount for target-date fund managers, he maintained. “Retirees are hyper-risk-averse.”

Retirement Income

There are three types of retirement income, each with pros and cons, said Marc Pester, senior vice president of Institutional Income at Prudential Retirement: self-insured, which are good when converting to an income stream but do not address longevity or downside market risk and are nonguaranteed; fixed annuities, which address longevity risk but give control over to an insurance company; and guaranteed minimum withdrawal benefit, a hybrid of the first two options, which addresses return, longevity and conversion risk, protects participants’ income base and gives them flexibility and control.

Asked if, at Prudential, the primary sales opportunity for these products was direct to the plan sponsor or indirect through the adviser, Pester said the adviser is always important in these sales. “Is the defined contribution plan truly being relied upon for retirement income? And, if so, is an in-plan retirement income solution appropriate?”

As to middleware products and the issue of portability, Pester said, when employing middleware the recordkeeper can access different solutions and track income base, so the participant can know what it is and understand it. Additionally, sponsors are not always tied to a certain income product or recordkeeper, allowing for some portability. Middleware can help assure people that if their provider takes a downturn, there is always an option to change to a different type of benefit for new dollars.