2018 PLANADVISER National Conference
Art by Leo Espinosa
How one adviser used shrewd management efficiencies to raise his profit margin 30%, and how two others learned to spot, and ignore, “due diligence” requests for proposals (RFPs)—thereby saving valuable time for their firm—were just two nuggets attendees may have gathered at this year’s PLANADVISER National Conference (PANC), held at the J.W. Marriott in Orlando, Florida, in September. For three days, top minds in the retirement planning industry discussed topics such as these and other “Pathways to Plan, Participant and Practice Success.”
Amply represented among the moderators and speakers were PLANADVISER Top 100 advisers and PLANSPONSOR Retirement Plan Advisers of the Year, who detailed how they have applied emerging trends and best practices in running and building their successful firms. Additionally, two 2018 PLANSPONSOR Plan Sponsors of the Year revealed what they look for and value in a plan adviser partner.
DOL Audits of Retirement Plan Advisers
“The Department of Labor [DOL] has become very focused on investment advisers,” said David Kaleda, principal, Groom Law Group, Chartered, speaking on the “DOL Audits of Retirement Plan Advisers” panel at the 2018 PLANADVISER National Conference. “The Employee Benefits Security Administration [EBSA] manual says they will target the adviser and provider communities.”
In particular, DOL is interested in compensation disclosures, Kaleda said. Groom Law Group is currently helping clients handle more than 30 DOL investigations, he said. In 1996, it was typical to be working on only five.
What prompts the DOL investigations are referrals from the Securities and Exchange Commission (SEC) about non-level compensation from a third party or other indirect payments that could potentially be construed as conflicted, he said, as well as private lawsuits or complaints lodged with the DOL by a retirement plan fiduciary or participant.
Sheridan Road Financial was subject to a DOL investigation of its Employee Retirement Income Security Act (ERISA) practice in 2015, said Jim O’Shaughnessy, managing partner. “It put us on the defensive and lasted two and a half years, only ending earlier this year,” he said. “It was actually very good practice for us to go through,” O’Shaughnessy said. “The DOL is trying to understand our ERISA advisory practice, what services we provide and how we are compensated.”
The fact of the matter is that advisers are compensated in numerous ways, he said, sometimes through ERISA budgets at the recordkeeper, or as a broker, a registered investment adviser (RIA), a 3(38) fiduciary or through a forfeiture account. “The main area of the DOL’s concern is to look for settlor, non-fiduciary actions, which may have been compensated through the plan, which is not permitted,” he said.
Changes to plan design cannot be paid for by the plan, Kaleda said. As a result of the DOL investigation, Sheridan Road Financial reworked all of its contracts to include settlor functions paid for directly by the plan sponsor, O’Shaughnessy said.
Top Trends
When it comes to the age-old retirement plan industry debate on whether to invest in actively managed or passively managed funds, “our industry focuses on the spin, as opposed to the facts,” said Rick Fulford, executive vice president and head of PIMCO’s U.S. retirement and defined contribution businesses, speaking at the session, “Top Trends.”
“One and a half years ago, we decided to take a look at this active/passive debate with objectivity, looking at the Morningstar direct universe of stocks and bonds and their institutional share class performance over one, three, five, seven and 10 years,” Fulford said. “Passive wins the equity battle. Only 35% of actively managed equity funds beat their indexes at the five year mark.”
When it comes to bonds, with intermediate, global and high yield bonds being the most popular in defined contribution (DC) plans, 85% of actively managed bonds beat their benchmarks, Fulford said.
The reason for the discrepancy between actively managed equity funds and bond funds, he said, is that “the bond market is unique. It consists of a large contingent of non-economic players, folks with an objective other than risk-adjusted returns,” he said. “These include central banks, which perform quantitative easing, defined benefit pension plans interested in hedging and insurance companies. They control $50 trillion in bonds, and with the total U.S. bond market being $100 trillion, they can create dislocations.”
He continued: “managing bonds passively is much more difficult and expensive than managing equities. There is a high turnover in fixed income—40%—because bonds mature.”
PIMCO also looked at the fees of actively managed versus passively managed equity and bond funds and discovered that there is a 60 basis point premium in equities for actively managed funds, versus a 30 basis point premium in bonds.
“Actively managed fixed income has a lot of value to add,” Fulford said. “In equities, there are pockets where alpha can be found and others where there are efficiencies and passive management makes sense.”
Plan Committee Excellence
Bruce Lanser, senior retirement plan consultant with UBS Retirement Plan Consulting Group, moderated the panel on “Plan Committee Excellence,” which featured Stephen Rubino, senior vice president of institutional services at Financial Engines; Tim Irvin, consultant with Cammack Retirement Group; and Robert J. Rafter, president of RJR Consulting.
While all on the “Plan Committee Excellence” panel, moderated by Bruce Lanser, senior retirement plan consultant with UBS Retirement Plan Consulting Group, agreed that the retirement plan industry has evolved substantially in the last decade, they also agreed that, to this day, oneone of the most common main reasons plan sponsors turn to advisers is to getfor assistance aid with governance—, including with instituting items such as putting in processes that help them avoid litigation and running an efficient committee meetings. Advisers do this both by working hand in hand with the plan’s retirement plan committees, the panelists said.
According to Robert J. Rafter, president of RJR ConsultingRafter, there is a “terrific opportunity out there” for advisers to work with retirement plan committees because, simply put, many employers simply lackdo not have the internal expertise to ensure the retirement plan is run in an efficient and compliant manner.
“Doing regular training and working with plan committees will remain a terrific opportunity as the legislative and regulatory picture shifts, and it is a win-win for the adviser and client,” Rafter said. “In my opinion, working with plan committees to make sure they are fulfilling their responsibilities makes your 3(21) fiduciary and 3(38) fiduciary investment services that much more powerful.”
Tim Irvin, consultant with Cammack Retirement Group,Irvin agreed concurred with that take assessment, and adding,ed that “Ggetting the right people in the room who can consistently make the right decisions for the plan is a challenge, but it is so crucial.”
“I don’t know that there is a right number of individuals for the committee,” he noted. “Two people is probably not enough. It’s really more about getting good representation of the demographics in the plan, and expertise across finance, staff roles and benefits. I think a group in the mid-single- digit range is sensible. And having an odd number of people seems to be helpful to prevent gridlock.”
The Future of Retirement Advising
Advisers on the “The Future of Retirement Advising” panel said eEven though the Department of Labor’s (DOL’s)’s fiduciary rule has been vacated by the 5th Circuit Court of Appeals, it has prompted consolidation of practices, said advisers on the panel “The Future of Retirement Advising.”
“We grew 66% last year and expect growth of 80% this year,” said Vincent Morris, president of Resources Investment Advisors. “That was driven by consolidation and advisers needing help on the rule. We are an aggregator. Companies can remain independent and have access to scale, innovation and financial wellness programs. They are under margin pressure and more demand from sponsors for services, so I think we w’ill continue to see that scale.”
Edward O’Connor, a managing director with Morgan Stanley Wealth Management, agreed., saying, “We definitely see consolidation. It’ is harder for generalists to seek out opportunities because there is a higher standard of care for the 401(k) business.”
As for working with recordkeepers, Jon Anderson, head of retirement plan solutions at Cetera Financial Group, said that advisers will become more selective about which companies they work with: “Advisers need to align with organizations that will support them. Advisers can’t do it on their own,.” he observed.
Resources Investment Advisors works “with 56 recordkeepers, which is unsustainable,” Morris said. “We want to bring that down to 12 in order to have pricing and resource leverage.” Resources Investment AdvisorsThe firm would also prefer to work with recordkeepers that offer “more of a partnership,” he said—“managed accounts, financial advice, an economics play. We will be interested to see how this pans out in the next five to 10 years.”
Currently, Morgan Stanley Wealth Management “scrutinizes recordkeepers, performing due diligence on how they engage with participants,” O’Connor said. Morgan StanleyThe firm also prefers to work with recordkeepers that can “train our advisers to be specialists,” he added.
A poll of the audience found that 51% offer proprietary education to plan sponsors and participants. Ninety-five percent said that these programs include comprehensive financial wellness, such as budgeting, college savings and insurance. Sixty-three percent of the audience members said that they or their team offer investment advice.
The Value of an Adviser—Plan Sponsors Tell All
“The conversations we have with our retirement plan adviser are always about getting the plan to a better place,” said Joanna Farrere, senior vice president, human resources (HR) and administrative services at the Illinois Health and Hospital Association.
Farrere, speaking was speaking on “The Value of an Adviser—Plan Sponsors Tell All” panel, was representing. She was invited to speak, as the Illinois Health and Hospital, which had been Association was selected as the 2018 Plan Sponsor of the Year in the non-profit defined contribution (DC) category for plans with less than $100 million in assets.
Heather Masterson, human resources director at Hendrick Motorsports, which also won 2018 Plan Sponsor of the Year, in the corporate $50 million to $100 million category, said she, since the award she is constantly receivinghas been bombarded with solicitation calls from recordkeepers and advisers. “There’ is a tremendous amount of interest in doing business with us,” she said. “We are constantly receiving requests to connect on LinkedIn. It can be overwhelming at times.”
Asked whether she would consider those solicitations, Masterson said, “It’ is all about the personality. If they make a concerted effort to know the plan or to tell me they can offer a second set of eyes to examine it,” she wouldill consider hearing them out. “It’ is all about building a relationship with us.”
Farrere agreed: “Do they know who they are calling, and have they reviewed all the publicly available information? Are they offering to provide me valuable information, such as a white paper they have produced, or to tell me about a new regulation that was passed?”
As to what Farrere expects from her retirement plan adviser, it is to be “a trusted source, really pushing me forward to think about new strategies and to keep our team—the recordkeeper, the committee and the auditor on the plan—together. We have weekly conversations with them about what we should be doing.”
Winning the 2018 Plan Sponsor of the Year award has inspired Hendrick Motorsports “to look at a broader time horizon to get things done,” Masterson said. “We now have a three-year plan, and the adviser helps us prioritize all of the things on our mind.”
Understanding the Participant Mind
Obtaining reliable data about participants is important to figuring out their needs, said Shannon McCarthy, senior consultant, brand leader at Nationwide, speaking on the “Understanding the Participant Mind” panel.
“You can extrapolate data from a retirement readiness tool and pair it with third-party data,” McCarthy suggested.
Dan Peluse, director of retirement plan services at Wintrust Wealth Management, said it is also possible to leverage recordkeeper technology, “but it will be an incomplete picture. It’ is better to drive them towards an aggregator.” It also helps to have one-on-one meetings with participants.
Brett Shofner, president of Work Plan Retire, said obtaining data on participants so that the adviser can tailor communications to them is key. “The lines are blurring between health care, retirement and general wellness,” Shofner said. “Participants are overwhelmed, so you need to make it simple for them. Tailor communications to their mindset.”
Nationwide conducted research on workers who are eligible to participate in their retirement plan but do no’t, McCarthy said. To the company’s surprise, it learned that “many people don’t understand our industry or how this benefit works.”
Peluse agreed: “Many Millennials have been automatically enrolled and still don’t know what a 401(k) is.”
Nationwide has moved many of its participant communications to social media, McCarthy said, adding that the firm “continues to look for the next disrupter.”
To resonate with participants, advisers need to address what is top of mind for them, Peluse said. “Retirement planning doesn’t rank very high,” he said. Rather, workers are concerned about student debt, health savings accounts [HSAs] and other financial issues.
“We are expanding our practice to be a financial coach,” Peluse said. “We have diverse participants with different priorities. We rely on recordkeeping tools to have those conversations, to strengthen our relationships with plan sponsors and go beyond the 401(k) to discuss debt and college loans.”
Because so many workers don’t even understand what a 401(k) is, it would help if their peers could act as everyday advocates, McCarthy said.
Responding to RFPs
The 2018 PLANADVISER National Conference included a frank and wide-ranging panel discussion on the timely topic of responding to requests for proposals (RFPs).
Panelists included Brian Hanna, senior plan consultant with Everhart Advisors, and Jason Chepenik, managing partner of Chepenik Financial. Their consensus was that the use of formal RFPs for the adviser search are is clearly moving down- market. Liability and litigation risk are driving this trend, but more plan sponsors are also doing RFPs to help improve participant outcomes.
Both panelists agreed that, as a growing advisory business, knowing when to respond versus not to respond to a given RFP is an art form.
“When you are first starting an advisory business, you feel the need to say ‘yes’ to everything, to respond to every seeming opportunity that comes into your mailbox,” Chepenik saiduggested. “As your business expands, this will help you to learn when to say ‘yes’ and when to say ‘no.’ These days, I’m lucky that my firm can be more selective about who we respond to. First and foremost, we like to see plan sponsors with clear goals and objectives.”
Hanna agreed, warning noting that, even for mature retirement plan advisory businesses, responding to the wrong RFP once in a while is inevitable, and it can burn up a lot of valuable time.
“I would even encourage you to ask [yourself]ing frankly , ‘Wwhat is the purpose of their RFP?’” Hannah said. “Increasingly these days, RFPs are, in fact, just a due diligence process aimed at documenting a decision the potential client has already made—namely, keeping their current adviser.”
Another consideration shared by both panelists shared wais that an firm adviser will see much more success in the process if they it hasve some type of advocate or center of influence within or around associated with the employer conducting the RFP.
“If there is just an RFP coming out of the blue,” Hannah said, he is suspicious. “When we hear from an employer just through an RFP who has never contacted us otherwise, this makes it seem more like a due diligence process rather than a real, honest RFP that we could win.”
Practice Efficiencies
Speaking on the “Practice Efficiencies” panel, David Griffin, founder and owner of Atlanta Retirement Partners, LLC, said that hiring the right people is the first step iton achieving practice efficiencies. “When I started, I was doing everything myself,” Griffin said. “I realized I needed to supplement my weaknesses with someone who has those strengths in order to make me more efficient.”
Griffin found a candidate who was working from for a recordkeeper and who was making six figures. He negotiated with the personm by offering to pay them $65,000 in salary plus the perk ofand allow them to working from their househome. The following year, he hired another person from Principal. This allowed him to focus on sales, while his staff handled Excel spreadsheets and requests for proposals (RFPs).
“Getting people in the right role improves client service,” he said. It also enabled him to move his profit margin from 30% to 60%, which then allowed him to lower his fees. Additionally, Griffin alsohe said, he uses a Colby screening process to figure outdetermine people’s strengths. “This can help organizations be more profitable,” he said.
Joseph DeNoyior, managing partner with Washington Financial Group, said he also uses Colby screens, not to hire people but to figure outascertain how best to communicate with his staff. “It helps us to better manage human capital in order to best serve clients,” he said.
“Once every six months, we have every team inventory what they do every week,” DeNoyior said. “Our CFO [chief financial officer] then analyzes these functions to figure out what positions or services we need to fill.”
Besides this, Washington Financial Group offers three different service tiers to clients. “This allows us to deliver consistent service,” he said.
Another way that the practice ensures that it can deliver consistent service should a team member be out of the office, is to have team members trade jobs for a day so that they can fulfill those functions. “It also gives them an opportunity to suggest how their peers could be doing their jobs more efficiently,” he pointed out.
DeNoyior suggested yet another way to achieve efficiencies:s is to have multiple retirement plans operateing off of the same platform. Griffin added that “some recordkeeper providers allow us to cascade trades across all plans.” Griffin also said that recordkeeper resources, such as participant education, are also very valuable.
Team Building
The “Team Building” panel explored the various ways a retirement advisory practice can expand. Citing data from Ann Schleck of Fi360, Joseph Lee, senior vice president, head of retirement platforms and strategy at First Eagle Investment Management, LLC, said that only 17% of teams are “elite.” They get there first by “forming, then by storming, norming, and, finally, performing,” Lee said.
“Once they get there, they are humming on all cylinders,” he said, noting that elite teams advise 44% of all of the plans in the nation and 92% of the assets. “They have achieved excellence in effectiveness and efficiencies,” Lee he saidobserved, noting that their average assets under advisement (AUM) per adviser is $1.33 billion and average 25.6 plans per adviser is 25.6. These teams divide up roles by having some members focused on running the practice and others on selling and business development, he said.
Answering a question from moderator John Ludwig, a financial adviser with LPL Financial, about what roles a practice should first focus on first when looking trying to expand, Eileen Greenspan, senior vice president with Sentinel Benefits & Financial Group, said it is “Cclient-facing positions., We are, after all, in a relationship business.,” she said.
In addition, it is important to have a strong “back-office team, including analysts, who can provide incredible support,” she said. From there, “as you grow your team further, add members who can spend time with participants to educate them,” Greenspan said. “That’ is how we developed our team.”
Ludwig then asked Bill Rice, director of adviseor development at Pensionmark Financial Group, LLC, what aspects of a team can be centralized at the home office. Rice agreed with Greenspan that client-interfacing staff are important, and that these employees can be centralized, along with salespeople.
“One way to grow is to bring on additional people yourself,” he said. “Another is to look at affiliation models” like such as Pensionmark, “or acquisition models. There is no one way to do it, but you do need to think about how you’ are going to compete with elite organizations, and how other advisers might go after your business,” Rice said.