Facing It Together

How much to save might be the most important decision made by a plan sponsor, but for plan fiduciaries, the choice of which offerings to invest that savings in can be fraught with concern. Alison Cooke Mintzer, Editor-in-Chief of PLANSPONSOR and PLANADVISER, spoke with Joe Frustaglio, Vice President and National Sales Manager at Nationwide Financial, about how advisers can help their clients navigate their fiduciary responsibilities and improve investment outcomes for their plan participants.

PA: What do you think are the most significant challenges for retirement plan advisers?

Frustaglio: As I travel around the country and listen to what advisers are facing, there are legislative and regulatory changes, and keeping up with those on behalf of sponsors is first and foremost. Second, many are concerned about how to grow their practice without adding a ton of expense, and about working with the right providers that have the support they need.

I’m really encouraged by the fact that many advisers understand that we have a savings crisis and see it as an opportunity to help America’s workers and business owners close that gap. They see it as their responsibility to take control of this and make sure that people are prepared for retirement.

PA: What are advisers and broker/dealer (B/D) firms looking for in providers and products?

Frustaglio: Advisers want to do business with firms that are totally committed to the retirement plan marketplace, and they look to providers to help them be efficient in growing their practices. From a product standpoint, it’s necessary to be able to serve clients on the spectrum from very simple to complex, and to be able to provide flexibility within those products. Advisers do not want to have to deal with seven different providers, they want a partner that can do a number of different things.

Advisers clearly compete on the health of the plan. So, making sure you work with a provider that can demonstrate how the adviser has made a difference in this plan—advisers need proper documentation, data feeds, everything. We’re seeing, from the broker/dealer firms, more requests for data feeds and additional plan information. They’re looking at more sophisticated ways to attract advisers to their firm.

I think everybody has to demonstrate their value now more than ever. It goes back to whether firms are committed to this marketplace, willing to spend the money on all these feeds that need to be directed to the firms and so forth, and of course, Nationwide Financial is willing to do that.

PA: Let’s move on to plan sponsors—how do their wants differ when it comes to what they’re looking for from an adviser versus a provider?

Frustaglio: Ease of use comes to mind first. This is an employee benefit, and they want it seen as a benefit by their employees. It’s really important that the service is extremely good and that it is communicated in such a way that it does attract and keep employees.

Employers also want options. They have people who desire the simplicity of a target-date fund (TDF) or managed accounts—a “do it for me” approach—and for employees to go outside the core lineup, they want options there as well—a fund window or self-directed brokerage.

Those are the things that the adviser and plan sponsor want together; they both want ease of use and to have options for the different demographics of the group.

Sponsors want support from the adviser, the provider and, in many cases, outside constituents, whether that be a 3(38) or 3(16) fiduciary. The sponsor really counts on the adviser for help in discussing all options. The adviser, on the other hand, wants providers who can go in different directions for them. In many cases what they desire is the same, but how they’re delivered is different.

Sponsors and advisers don’t differentiate between sales and service. It’s all one. So, if I’m going to do business with you, it’s just not a sale. After you sell something, then the work starts, the pressure comes and you have to deliver a very high service level. Advisers and plan sponsors count on you for that. The adviser is out in front, making sure that it’s viewed as an employee benefit, how a plan works and how it’s being served, and we count on the adviser for that feedback and communication.

PA: We’ve seen a huge influx and interest in target-date funds. With this popularity, what are the considerations for both advisers and plan sponsors when selecting a fund family to put on a plan’s lineup?

Frustaglio: Like any fund selection in a plan, this is a fiduciary decision. If you utilize a 3(38) fiduciary, they will take the lead with this process and make that selection. From an adviser standpoint, they help the sponsor with the process, making sure they ask the right questions and requesting relevant feedback about the demographics of the group. These fund choices need to be reviewed and evaluated over time to make sure that they’re the right fit for the demographics of the plan.

PA: Managed accounts are also a qualified default investment alternative (QDIA), and those haven’t gotten quite as much traction as TDFs have with plan sponsors. Why should advisers discuss managed accounts with their plan sponsor clients?

Frustaglio: In committee meetings, when we ask how many employees have the desire, the knowledge and the time to manage their retirement account, we get the blind stare.

If you’re a target adviser and you have 50 plans and you average 100 employees, that’s 5,000 different accounts. So, managed accounts are important because participants want and need the help. Schwab did a study recently on what participants are looking for, and 57% wish there was an easier way to choose investments, 46% don’t feel they know what the best investments are to meet their goals, and 61% felt twice as confident in making decisions when they had this personalized investment advice.¹

The other thing is that managed accounts are paid for by the participants, it’s not an employer cost. If a participant in a plan wants this, it’s not subsidized by the whole group.

Often, plans with this option are healthier. Hewitt Investment Group did a study between 2006 and 2010—note 2008 being right in the middle—where participants averaged almost 3% higher returns with a portfolio with assistance from a professional money manager.² These accounts are growing faster than the rest.

PA: You generally hear plans add either a managed account or a target-date fund. Do managed accounts compete with target-date funds within a plan lineup, or is there an opportunity for them both to coexist?

Frustaglio: That was something we reviewed at Nationwide. We took a look at our block of business, and when we offer both target-date funds and managed accounts, it results in 38% more participants choosing one or the other, and 69% are more active under professional management.³ That’s been very successful for us.

PA: What do you do for plan participants who want to take control of their investments or invest in a way that considers their outside assets as well?

Frustaglio: In the late 1990s, early 2000s, there was a big boom in this attraction to self-directed brokerage because the market was going crazy. After a couple of years, we looked at what participants were buying: They weren’t buying stocks, they weren’t buying bonds, they were buying more or different mutual funds. That was when we decided, instead of a group annuity contract, let’s build this trust platform, and instead of having 60 funds in the lineup, let’s open it up to 1,000.

When we did that, we did that for the plan sponsors. The plan sponsor at the time would have providers who had 60 fund options, and they would include all 60 in the core fund lineup. They had to track 60 different fund options. We decided to build Fund Window. Within our product, the different money managers can use the funds in a core fund lineup or go through Fund Window to utilize the balance of the 1,000 funds.

We don’t charge the plan or participants any additional fees for Fund Window, and we don’t charge them any transaction costs, but we’ll allow the plan sponsor to have a small core fund lineup. Instead of having 60, now they’re down to 14, and with target-date funds in the mix, you could actually do this with about 12 funds.

This results in a small core fund lineup that’s easy to manage from a fiduciary standpoint. Then, if they wanted to allow their participants to go through Fund Window, the participants would sign off, acknowledge that they’re outside the core fund lineup, and it would allow them to have a platform of 1,000 additional funds.

This was great for both participants and plan sponsors—lower costs for participants because they don’t have to get those funds through a self-directed brokerage account or pay the transaction costs, and sponsors could just manage a smaller core fund lineup. That’s been a huge success for Nationwide as we compete in the market. Third-party money managers on our platform have access to all those funds as well. We haven’t had much competition in this space; our trust platform allows us to do that, and we’ve done it for a long time.

Fund Window helps simplify the fiduciary review process. It allows fiduciaries the flexibility to make a change to the core lineup, while still giving a participant access to the replaced fund.

PA: What advice do you have for advisers looking to build their practice?

Frustaglio: The demands on the adviser are many. I recommend they use all the resources that are available to them by picking partners who are committed to the participant, the industry and to the growth of the adviser’s practice. Working with credible third-party administrators (TPAs) is huge, and TPAs in our world have done a great job supporting us and our advisers. They have a knowledge level that you want to tap into for plan design and compliance, which can really help.

We see outsourcing of fiduciary responsibilities more and more, whether that be 3(21), 3(38) or even 3(16). How do you utilize those resources to make sure that they can help you grow your practice? When advisers start taking on fiduciary roles, it’s very time consuming. How do you go from 30 to 40 plans and not add staff?

Our defined contribution investment only (DCIO) partners and our money management partners are huge. We utilize them frequently to help pick target-date funds or do employee meetings. They’re a huge resource for us, the provider and the adviser. The advisers that do this really well have this core group that they go to for support, they don’t try to do it themselves.

You can work with professional money managers that build platforms to help plan sponsors accomplish their goals. The beauty of where we are with this is that many asset managers are investing in this business like never before, and the value-add pieces that they have are extremely helpful and on target for what the adviser is looking for. We’ve done a great job partnering with those folks and matching up with broker/dealer firms, making sure advisers are getting what they need in order to grow their practice while helping participants prepare for and live in retirement. We’re in it together, which is great.

¹ Charles Schwab, The State of 401(k) Investing (2013).

²
Hewitt Investment Group Study, Help in Defined Contribution Plans 2006–2010; study analyzed eight companies over the five-year period from 2006 through 2010.

³ Nationwide Financial Study (12/31/12).

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