2017 PLANADVISER National Conference

The 2017 PLANADVISER National Conference was held this year Oct. 11-13 at the J.W. Marriott in Orlando, Florida. The theme for this year’s conference was “Above and Beyond: How Leaders Are Confronting Fiduciary Change and New Market Realities.”

As with our conference every year, the top tier of retirement plan specialists from around the country—including many from the PLANADVISER Top 100 and the PLANSPONSOR Retirement Plan Advisers of the Year—gathered for half a week of discussion and debate on cutting-edge developments in our industry.

Washington Update

“What is being delayed… [is implementing] the complicated exemptions,” he said. “The DOL [Department of Labor] has proposed delaying them an additional 18 months, until 2019. It is processing the comment [letters] and will send [the proposed rule] to the OMB [Office of Management and Budget]. It will then need to publish [the rule] in the Federal Register. Consumer protection groups have threatened to sue if the 18-month delay is put into effect.”

However, noted David Levine, a principal with Groom Law Group, Chartered, “The U.S. Chamber of Commerce might countersue, or the DOL might say that the fiduciary rule wasn’t done properly. It’s kind of like the bills to repeal Obamacare,” in that the efforts to squash the fiduciary rule’s best interest contract exemptions (BICE) have, so far, been for naught. “For those who wish for this to die, you might get it and regret it because the DOL might interpret the old rule in a new way,” Levine said.

In addition, Levine continued, “The SEC [Securities and Exchange Commission] is talking about a combined fiduciary standard for brokers and RIAs [registered investment advisers], although it doesn’t have oversight of ERISA [Employee Retirement Income Security Act]. [DOL] Secretary Acosta said he is talking with the SEC, and the states themselves can take their own actions.”

The bottom line, Levine stressed, is that “even though everyone has ‘fiduciary rule fatigue,’ the rule is not dead.”

Clark added, “The only thing delayed is the exemptions.”

Levine stressed to the audience that, in the interim, advisers will “have to follow impartial conduct standards and document their processes, even though the processes are vague.”

Certainly, Clark said, a big part of these standards for advisers is ensuring that “their own fees are reasonable”—and benchmarking them.

Levine conceded that “there is no hard and fast way to determine if your fees are reasonable” but that advisers should not be too concerned about this. “I think this is a litigation loser, a tempest in a teapot,” he said. “DOL is not pushing too hard on this.”

The important thing for advisers to remember, Clark said, is to “have a process to document their fees and meet the impartial conduct standard.” It is also a good practice to charge level fees, he said, rather than fees based on commissions or revenue sharing.

Practical Fiduciary Practices

Retirement plan committees have a host of responsibilities—most of them fiduciary. To help them fulfill their varied, and demanding, fiduciary roles, advisers can turn to a number of practical strategies.

Jania Stout, practice leader and co-founder of Fiduciary Plan Advisors, and moderator of the panel, said her firm doesn’t build materials for committee meetings itself, but looks to providers, law groups or industry-related articles. Mostly the same message can be delivered to all clients, she said, and advisers don’t have to create their own content.

For plan sponsors lacking internal staff with investment expertise, a good foundation to build on is an investment policy statement (IPS), said Jason Trine, managing director – investment platform distribution, at Principal. “Plan sponsor clients don’t have to have [an IPS], but it is good for laying the groundwork of what the adviser and the client are going to do,” he said. “Some providers, such as Principal, have model ones plan committees can use.” Trine reiterates that the overarching theme is to have a process for accomplishing goals with clients.

Another practical practice, according to Phyllis Klein, senior director, consulting research group at CAPTRUST Financial Advisors, is training. She noted the evolution in the definition of “fiduciary.” Advisers need to instruct plan sponsor clients that they are considered fiduciaries and offer them training on what that means, she said. Training should involve program materials that are understandable and actionable.

Klein has found that committees, themselves, want to be trained—on investments, and also financial jargon as they don’t always understand the terms advisers use in quarterly meetings. She added that advisers should also train client committees on plan governance and operational requirements.

Stout pointed out that committees are always interested in litigation updates.

At CAPTRUST, to address that interest, two advisers who are also ERISA [Employee Retirement Income Security Act] attorneys, create communications about the latest litigations and what lawsuits and court decisions mean for plan sponsors, Klein said.

According to Stout, plan sponsors also have a need and demand for target-date fund (TDF) analysis. Her firm has implemented the Department of Labor (DOL)’s tips for TDF analysis and goes over them with each client. At every committee meeting, the sponsor must respond to a checklist, to document whether it has adhered to the tips.

Lessons in Litigation

Thomas Clark Jr., a partner in The Wagner Law Group, said that litigation in the retirement plan market is strong.

New firms have jumped into the fray, following the model of Schlichter Bogard & Denton, a firm that has been bringing lawsuits against retirement plans and providers for years. “There are a half dozen of these firms filing complaints,” Clark observed.

David Kaleda, a principal at Groom Law Group, Chartered, added that law firms are getting creative—moving down-market and to very large 403(b) plans. “It’s a good way to get lots in recoveries,” he said.

But, Clark said, for smaller plans, the plaintiffs’ bar will realize it has “caught the bumper” and won’t get a payout to compensate for what it pays to litigate. He believes, going forward, small plans will not see much litigation.

From cases that have been filed and decided, there are lessons to be learned. According to Clark, decisions in self-dealing cases are turning into process claims, which say, “You should have done something.” However, this doesn’t mean a plan sponsor or defendants have violated the Employee Retirement Income Security Act (ERISA).

Kaleda noted that Fidelity was dismissed from the Verizon excessive fee case. “Service providers are targets of suits because they have the deepest pockets. But they are usually not fiduciaries and not responsible for alleged claims,” he said. “Recordkeepers usually make sure they are not fiduciaries, but the plaintiffs’ bar [has] tried to make cases showing they are.”

For example, Kaleda said, in the Delta case citing Fidelity and Financial Engines, where the plan sponsor offered a managed account program Fidelity sponsors, the court said Fidelity did not act as a fiduciary when it set its compensation structure for a chosen plan sponsor service. Kaleda explained that providers can get into trouble making recommendations that create compensation for themselves, but setting a fee structure for services that plan sponsors agree on is not a violation of a fiduciary function.

Kaleda said decisions in other lawsuits against retirement plans have shown that plan sponsors and advisers just need to show there were fiduciary processes in place for selecting and monitoring investments and providers.

Guide to the Markets

Plan Sponsor Confidential

Two winners of this year’s PLANSPONSOR Plan Sponsor of the Year awards spoke about how their adviser has helped them—and why they thought they needed to start working with an adviser in the first place.

“The main reason is inertia,” said Larry Schmidt, director of human resources (HR) at Searles Valley Minerals, of why Searles hired Bukaty Companies Financial Services as its retirement plan adviser. “We are a mining company, and the leadership and employees don’t change often. Some of our employees are in their 80s. We are cautious in making changes, but we realized that sponsors will ultimately be held responsible for plans that don’t produce. We needed to get off the dime.”

The retirement plan committee of LSG Group “wasn’t convinced we needed help from an adviser because we had help from our finance department,” said Tobias Junker, vice president of human resources total rewards and labor relations. “But when we were asked about our fiduciary responsibilities, [we could not answer.] We decided to create a three-pronged approach comprised of the fiduciary committee, the recordkeeper and a retirement plan adviser, whose independence from the recordkeeper is key,” Junker said.

Schmidt agreed that it’s a fallacy to think a recordkeeper can accomplish all of the things that an adviser does. However, by “working together, they can work well in sync,” he noted.

The primary task that LSG Group’s adviser was charged with, Junker said, was to combine the company’s 22 entities—all with their own 401(k)s and very different needs. The adviser issued a request for proposals (RFP) and meticulously reviewed the results over the course of two years, he said. Then, once Bank of America Merrill Lynch was selected as the recordkeeper, it took LSG and its adviser nine months to create an investment lineup, Junker said.

The end result was lower administration and investment fees, and higher participation. The adviser also recommended automatic enrollment and escalation, which, Junker said, “work perfectly.”

As far as what Bukaty has brought to the table for Searles, Schmidt said, “There are dozens of examples of how [Vince Morris, president] has helped us,” not least of which is recommending automatic enrollment at a 4% deferral rate paired with 1% annual escalation up to a 10% threshold and re-enrollment into a target-date fund [TDF].”

“We went from an 83% participation rate to a 96% participation rate, with a 40% increase in the average balance,” Schmidt continued. “Our adviser gave us the courage to do it.”

Maximizing the Workplace Savings System

Talking about his new book, “From here to Security – How Workplace Savings Can Keep America’s Promise,” Bob Reynolds, president and CEO of Great-West Financial and Putnam Investments, urged advisers to “fight to create a new sense of a true People’s Capitalism.”

What Reynolds means by advocating for a “true People’s Capitalism” is the idea that not enough Americans have access to the financial markets, particularly in the form of tax-advantaged workplace retirement savings plan—and this needs to change.

“We know that the more savings you have in a society at large, the faster the growth rate of the overall economy,” Reynolds explained. “This seems counterintuitive because the invested retirement dollars are not going straight to consumption, but the growth comes because the money is injected right into the capital markets, and this, in turn, spurs on the economy. Talking about ‘Peoples Capitalism’ means building a direct link from the retirement planning conversation to the growth and stability of the economy. We should all be able to participate and benefit from the markets.”

As described in Reynolds’ new book, there is ample evidence to show that, should providing at least basic access to tax-advantaged workplace retirement savings be mandated for all employers, there would be some $5.5 trillion in additional savings injected into the capital markets over just the next decade.

“I don’t have to explain that such a large amount of additional investing would be a tremendous impetus for boosting growth,” Reynolds said. “This is why I am fully in support of things like open multiple-employer plans, as well as universal access in the workplace to payroll deduction individual retirement accounts.”

Turning to the potential role of the advisers in attendance, Reynolds observed that “every study we’ve done on the subject shows the clear value of advisers in this whole business.”

“When there is a skilled plan adviser in place, we very reliably see participation levels go up, contribution rates go up, and annual returns go up,” Reynolds said. “And so, we know the role of advisers in the business has been greatly successful and we need to continue this.”

He also repeatedly urged advisers to get in constant contact with their elective representatives and stress the crucial importance of protecting tax-advantaged retirement investing.

Behavioral Finance and the Future of Improving Retirement Outcomes

Professor Shlomo Benartzi, business school professor at the University of California, Los Angeles (UCLA), Anderson School of Management, and senior academic adviser at the Voya Behavioral Finance Institute for Innovation said that behavioral economics has the potential to markedly improve plan participants’ retirement outcomes.

He reflected on the campaign detailed in his book “Save More Tomorrow.” Basically, he said, people want to save, but will say they have no money to do that today. The campaign asked employees to save more later—specifically, when they get an annual pay raise. At that time, they will start receiving more, but if that money goes right into savings, they will not miss it. “People forget,” Benartzi said. “So, the campaign’s idea was to combat inertia with automatic savings.”

According to Benartzi, it took two years to find a plan sponsor willing to try out the concept, and the results were convincing. Average participant savings with the “Save More Tomorrow” campaign went from 3.5% in 1998 at that employer to 13.6%% in 2002. The plan sponsor, along with its adviser, asked the lowest savers to increase their contribution by 3% each year up to 12%, and 80% of them signed up. Benartzi said almost all who did so remained in the retirement program, but nearly 20% stopped at 9.4%. However, not one participant dropped back to a lower saving rate, and those who continued in the program and retired did so having four times as much retirement income.

“The right behavioral insights, placed with automated solutions to make things easy, worked,” Benartzi observed.

According to Benartzi, it took about 20 years for the ideas from “Save More Tomorrow” to fully catch on—the industry needs greater speed and scale to get more savers to their retirement income goals. He said technology is the tool.

A study by the University of Colorado with people who received 24 hours of financial education found general education did not work, but “just-in-time” education did. Benartzi explained that new savers do not need education about missing compounding interest opportunities if they cash out their savings at a job change—that information won’t stay with them. However, people shown the financial dimensions of their lives—how much they make and how much they spend—made progress. The study found that people provided with a mobile app offering this personal finance information checked it every two days; many used it in the morning before they made daily purchases. Spending went down by 15.7%, he said.

He shared some tricks for using technology to nudge people to save more. For example, if people read fast, they fail to take in all the information. Using digital tricks to slow down reading speed, such as setting off the text with ugly fonts or shadows, will get people to understand and remember what they read.

Measuring TDF Performance

As the panel laid out, passive strategies now account for 42% of the entire TDF market, compared with 27% in 2009. This growth in passive approaches is coming from large and jumbo plans looking to reduce fees, mainly, but it also extends into the midsize and smaller DC plan market. The panelists voiced some concern about this fast growth and questioned whether plan sponsors understand what could happen to passive TDFs during a sharp market downturn.

Alongside the trend of a strong shift toward passive management, the use of collective investment trusts (CITs) as a means of target-date investing continues to grow, with 52% of net TDF assets now invested through this type of vehicle. There is also some emerging evidence that the use of exchange-traded funds as the basis for target-date portfolios is increasing, though far more slowly than that of CITs.

The panelists all agreed that, while TDFs are known for their simplicity of use, this is something of a mischaracterization. It is true TDFs are relatively easy to use from the participant perspective, but there is a significant amount of preliminary and ongoing analysis required of the plan sponsor and the adviser to ensure the appropriate TDF strategy is put in place. Some of the panelists seemed to favor the approach of offering multiple glide paths to a given plan population within the same target-date product family, while others were more comfortable with the idea of finding a single, middle-ground glide path for the plan population. In either case, the panelists agreed that the adviser has a crucial role to play in helping sponsors identify, consider and ultimately select the best TDF approach for their plan.

The panelists mainly agreed that the only trend that may slow the growth in TDFs would be growth in managed accounts. They stressed that there is an emerging conversation about pairing TDFs and managed accounts together on the plan menu.