2015
PLANADVISER Adviser Value Survey

Leading the Charge

2015 PLANADVISER Adviser Value Survey - The Influence of Advisers on Retirement Plans

Value: the worth, importance or usefulness of something. In the world of retirement plan advisers, the word “value” is often followed by “proposition”—how advisers distinguish themselves to their plan sponsor clients and on what basis they expect their clients to judge them.

Creating a value proposition that distinguishes an adviser above the rest of his peers is a challenge for all advisers—not just those in the retirement plan space. A 2014 study by Pershing suggests that an effective value proposition should answer this critical client question: “Why should I choose your firm over the competition?” However, Pershing found, 60% of clients polled said that prospecting advisers from competing firms make similar or identical service-related promises to them, which makes it difficult for them to distinguish between the various advisory firms’ pitches.

Oftentimes in the retirement plan marketplace, advisers’ value propositions center around their fiduciary, plan-design and investment expertise. There is no doubt that skilled plan advisers are effective at improving retirement plan design and driving formal oversight. But, according to the 2015 PLANADVISER Adviser Value Survey, when attempting to quantify the value of an adviser to defined contribution (DC) retirement plans, the numerical values are, surprisingly, a bit challenging to discern.

In fact, the data—which segments the 2014 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?”—show that the average and median balances for plans with an adviser are actually slightly lower than those without the benefit of an adviser’s touch. Even more startling, plans with an adviser have only slightly higher average participation rates, and the average deferral rates are exactly the same.

Although in many categories, the statistical differences between plans with an adviser and plans without are merely a few percentage points, plans with an adviser are more likely to run their plan in alignment with fiduciary best practices—and plan sponsors are pleased with their adviser services. However, advisers should document not only the impressive results they have had with previous clients but also those that will confirm their value to their current clients.

One thing the survey does not control for is the type—or quality—of the adviser working on the retirement plan; plan sponsors only had to confirm whether they have an adviser on their plan or not. One can assume that, especially in the smaller plans among the sample, there may be a number of non-retirement specialists. In order to try and negate the influence of non-specialists on the results, the entire data set was rerun eliminating all plans with less than $25 million in assets. However, though the numbers changed, all but a handful of data points were directionally the same when focusing on plans with more than $25 million in assets as they were when the whole data set was analyzed.

Adviser Usage

Larger plans tend to rely on advisers much more than smaller plans. The sweet spot for advisers is plans with assets above $50 million, up to $200 million, with nearly three-quarters (74.9%) of plans in this range retaining an adviser. Plans in every range leading up to this size increasingly use advisers. More than two-thirds (67.1%) of plans in the more than $25 million up to $50 million range, for example, use an adviser. However, once a plan tops $200 million in assets, the likelihood of it retaining one begins to tick downward, with 70.6% of plans in the more than $200 million to $500 million range utilizing an adviser.

By comparison, only 45.4% of plans with less than $1 million in assets and just 56.1% of plans with more than $1 million up to $5 million in assets have partnered with an adviser. The same holds true when analyzing plans by number of participants: 73.6% of plans in the 1,001-to-5,000-participant range and 72.7% of plans in the 5,001-to-10,000-participant range have an adviser, compared with 61.9% of plans in the 100-to-500-participant range and 53.6% of plans with fewer than 100 participants.

Qualitative Adviser Influence

Advisers do have an appreciable impact on the presence of certain plan design features, particularly in regard to automating. Two-fifths (43.5%) of plans with an adviser automatically enroll employees, versus 35.5% of plans without an adviser, and 29.3% of plans with an adviser have automatic deferral increases, compared with 19.5% of plans without an adviser. Plans with an adviser are also more likely to have a Roth feature—53.9% vs. 46.9%. Advisers effectively influence sponsors’ decisions to offer a match, as 75.7% of plans with an adviser offer a match, compared with 66.7% of plans without an adviser. Plans with an adviser are also more likely to provide a profit-sharing or nonelective contribution regardless of whether a participant is deferring a portion of his salary to the plan—47.2% of plans with an adviser vs. 44.0% of plans without.

Advisers across all market segments are only slightly more apt to persuade a sponsor to vest participants’ contributions immediately at the time of enrollment; 35.2% of plans with an adviser do so, compared with 33.7% of plans without an adviser immediately vesting contributions. However, this is one of the data points that differs among plans with less than $25 million in assets, with adviser plans less likely to offer immediate eligibility than plans without an adviser, at 56.5% and 63.5%, respectively.

Advisers do appear to help plan sponsors keep in line with due diligence best practices. For example, plans with an adviser are more apt to have a written investment policy statement (IPS), 74.1% vs. 51.0%, and an investment committee, 81.4% vs. 63.0%.

Advisers also drive more frequent scrutiny of investments; 38.1% of plans with an adviser review their investment lineup every quarter, nearly double the 21.7% of plans without an adviser that do so. Plans without an adviser are more likely to review their investment menus once a year (46.8%), compared with plans that have an adviser (36.2%).

Plan sponsors with advisers say they are less likely to review their provider annually than those without; 57.5% of plans with an adviser conduct annual reviews, while slightly more plans without an adviser (58.3%) do. In fact, more than a quarter of plans with an adviser (26.3%) wait two or more years to review their defined contribution provider, whereas just 19.4% of plans without an adviser review their DC providers that rarely. However, this could signify that advisers, being in the marketplace more frequently than their plan sponsor clients, are involved in ongoing due diligence and therefore find less need to pursue a formal process as often.

That concept might also explain why plans with advisers tend to have shorter tenures with their providers, indicating that advisers send out requests for proposals (RFPs) to find providers with lower fees and more robust services. Just under half (48.5%) of plans with an adviser have been with their provider for seven years or more, compared with 59.8% of plans without an adviser having a provider relationship last that long.

Plan Metrics

When it comes to actual plan metrics—such as participation and deferral rates—plans with and without an adviser run fairly neck and neck, which would either suggest that advisers must become more focused on participant actions and drive better outcomes or perhaps that a plateau exists across the industry. If the latter is the case, maybe the evolving measures of success, such as higher deferral rates, are embraced only by an elite group of plan sponsors and advisers.

Take participation rates: Plans with an adviser have an average participation rate of 78.0%, compared with 75.9% of plans without an adviser—a boost of a mere 2.1 percentage points. Other metrics that bear notice: the average number of investment options offered, 20.5 in plans with an adviser vs. 20.4 in plans without; the average number of investments held by each participant, 5.1 vs. 5.3; percentage of participants with loans, 14.6% vs. 12.7%; and participant deferral rates, an even 6.4% for both plans with an adviser and plans without.

When it comes to 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. The average and median balances in plans with an adviser are $83,226 and $65,000, but are $85,304 and $67,508 in plans without one.

Value to Participants

One area where multiple studies have found a correlation between higher benchmarks and advisers is in participant savings rates. The 2014 PLANSPONSOR Participant Survey found dramatic differences between the savings rates of participants when a financial adviser is involved with the plan versus when one is not. For example, participants who utilize the services of financial advisers—either through their employers or on their own—start saving more money at earlier ages and save at higher rates continuously throughout their lives. Conversely, participants who do not use advisers save less at younger ages and then race to catch up as they get older. They generally have lower retirement savings throughout their lives and less confidence in reaching their retirement goals.

To put some savings data around the 2014 survey findings, 401(k) plan participants who use advisers are more likely at every age to have saved at least $100,000 for retirement. Even among those with less than $75,000 in household income, plan participants using advisers are almost three times as likely to have saved at least $100,000 for retirement.

Plan Sponsor Satisfaction

Nonetheless, sponsors are generally quite happy with their advisers. The percentage of plan sponsors that said they were “extremely likely to recommend” their adviser rose from 62.1% in last year’s survey to 64.4%. On a 7-point scale, sponsors rated their advisers an average of 6.38, up from 6.35 last year.

This satisfaction of plan sponsors was reinforced by a 2014 study from the Retirement Advisor Council, “The Value of a Professional Retirement Plan Advisor.” That study, though it showed no concrete statistics of improved participation or deferral rates when using a retirement plan specialist, found plan sponsors consider their advisers a key partner in running their plans. Ninety percent of plan sponsors agree that their specialist adviser simplifies plan administration, and nearly 60% say that, in the event of an administrative problem, they turn to their adviser first.

Retirement plan advisers might not add much quantifiable value to their clients across the board, but that hardly means they are not vital to a plan’s success.

Art by Adam McCauley