Greater Insight

Plans with advisers receive value beyond advice

Many retirement plan advisers like to talk about their value proposition to potential clients. Lately, those have often been taken to mean both plan sponsors and participants. But how quantifiable is that value proposition? 

“Plan sponsors want good service for themselves, but what they really care about is the participant experience,” says Steven Kaczynski Jr., senior financial adviser, managing director, fiduciary plan solutions at DBR & Co. in Pittsburgh. “With all the mergers and acquisitions in the recordkeeper space, plan sponsors are often worried about the service they’re getting for their participants. … Advisers can play a key role in guiding them.” 

The 2023 PLANADVISER Adviser Value Survey—which segments the 2022 PLANSPONSOR Defined Contribution Survey respondents into two categories based on whether they answered “yes” or “no” to the question “Does your plan employ the services of a retirement plan adviser?”—shows, in many cases, a correlation between having an adviser and a participant’s chance of accessing important plan design features.  

Some of these design elements are in-plan rollovers that provide tax benefits, more low-fee investment choices and more regular reviews of funds. At the same time, where the presence of an adviser seems to influence plan design and investment outcomes, it does not seem to affect average and median participation or deferral rates, or average account balances. Therefore, advisers might need to work harder to affect the bigger participant savings picture.  

The survey looks into specific ways, statistically speaking, that working with an adviser differentiates a plan from plans that do not work with an adviser. This year, we also examined how the adviser’s role either as a 3(38) or 3(21) fiduciary may correlate with particular plan design, oversight or evaluation elements.

Since  November  2021,  participants  have  been  free  to  roll  any  or  all  of  their  pre-tax  savings  into  an  after-tax  Roth individual retirement account. To have the option for Roth  in-plan  conversions  is  a  key  request  from  sponsors  and  participants  when  they are  presented  with  a  retirement  plan,  says  Kevin  Takinen,  401(k)  and  financial  well-being  manager at Sequoia Consulting Group in Phoenix. As  it  turns  out,  37%  of  plans  with  an  adviser  offer  an  in-plan Roth conversion, vs. 31% of plans without an adviser.

“In terms of investment lineups, everybody wants lower cost, and they deserve lower cost,” says Jim Sampson, director, retirement advisory services of Hilb Group Retirement Services in Boston. One popular way to reduce fees in retirement plans is by offering collective investment trusts; these are pooled, lower-cost investment vehicles that some analysts see overtaking mutual funds in the not-so-distance future. Advised plans have a greater likelihood of offering CITs—22% do—compared with 16% of non-advised plans.  

Whatever a plan’s investment options, it is important that these be regularly reviewed for quality, says Sampson. His firm reviews investments at least annually for smaller plans and quarterly for large ones.  

According to the survey, plans that use an adviser have a big lead on reviewing investment options; 46% do so quarterly, vs. 27% of plans with no adviser. Here, fiduciary status has an effect, where 66% of 3(21) fiduciaries review these options quarterly, compared with 44% of 3(38) fiduciaries, and just 24% of nonfiduciary advisers. As a 3(38) manager has discretion over the investments, the perhaps less-frequent reviews make sense.  

Meanwhile—and this may be an opportunity to point out why a potential client needs assistance—a somewhat troubling 14% of nonadvised plans review investment options less often than once a year; just 4% of advised plans are that lax

Last year, 401(k) loans and withdrawals increased as participants sought to contend with inflation, according to The Vanguard Group. The ability to take a loan was important to many, who were managing through both inflation and market volatility—and the vast majority of plans overall allow participants to borrow against their account.  

Of note is the work some advisers are doing to reduce the leakage often associated with loans. More plans with advisers (32%) either allow, or say they will soon allow, for separated employees to continue paying off any loans after termination, instead of needing to do so immediately. That compares with 23% of plans lacking an adviser. 

Having an adviser also correlates with participants having more possible options for in-plan distributions. Hardship withdrawals were relatively uniform across plans with or without advisers. But when it came to letting an employee access assets he had previously rolled into the plan, 38% of plans with an adviser allowed for such distributions vs. 28% without an adviser. 

Work to Be Done
In a sign that the 401(k) industry has advanced from its early days, advisers no longer seem to make a difference when it comes to many of the basics. Consider these snapshots: Employee participation is essentially flat at plans without an adviser (81%) as compared with plans that have an adviser (80%), and the average participant account balance is higher for plans without an adviser ($147,646) than at plans with an adviser ($143,095). 

These statistics show, on one hand, that plans can get people saving even if no adviser stands behind them. With new government legislation incentivizing businesses to offer retirement plans, effective in 2024, along with current and future state mandates that businesses do so, participation is apt to increase even more in coming years, says Kaczynski. That positive movement, however, still raises the question of: How can advisers help participants reach better savings outcomes? he says. 

“The conversation we’re often having is, ‘OK, we have essentially solved how to get more folks to participate,’” Kaczynski says. “But how do we get more people to engage with their savings and outcomes? That’s really the million dollar question.” —Alex Ortolani

Art by Valeria Petrone