In Practice August 26, 2014

Who Is Influencing Retiree Distribution Decisions?

Companies seeking to capture defined contribution (DC) retirement plan rollovers need to understand who is influencing retirees’ decisions.
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Previous LIMRA Secure Retirement Institute research has demonstrated that the rollover decisions people make are closely linked to whoever provides them with advice and guidance. For example, 53% of people ages 55 to 70 who had the opportunity to roll over a DC plan balance (of at least $10,000) during the 2009–2012 period, and whose decisions were influenced the most by a financial planner/adviser, chose to roll or transfer their balance to a company other than the plan provider. However, 55% of those whose greatest influence was a call center representative at the plan provider chose to keep their money with the provider, either by leaving the money in the plan or by rolling it into an individual retirement account (IRA) administered by the provider.

But, retirement plans sponsors can influence retirees’ decisions too, so LIMRA looked into DC plan sponsors’ interactions with retiring participants. All but 16% of plan sponsors polled for the LIMRA Secure Retirement Institute “DC Plan Sponsor Perspectives Study” indicated someone meets with retiring employees to discuss their distribution options—whether it’s someone from the plan sponsor firm, such as a human resources manager (49%); a representative from their plan provider (40%); or the plan adviser (15%).

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However, only three in 10 plan sponsors that meet with retirees (or arrange for such meetings with plan provider representatives or plan advisers) recommend a particular course of action. Plan sponsors cited a variety of reasons they do not recommend any specific action to retirees. One of the most common concerns is fiduciary responsibility (38%)—they do not want to go beyond what is required by making a recommendation that could be sub-optimal for the participant, thereby risking legal or other negative consequences. Some are even instructed by their plan advisers (18%) or providers/recordkeepers (11%) not to make a recommendation, most likely to avoid fiduciary problems, LIMRA says.

Nearly half (46%) do not want to adopt a one-size-fits-all approach, recognizing that financial circumstances vary widely across individual retirees. More than one-third (37%) of plan sponsors do not provide distribution option recommendations because plan provider/recordkeeper representatives do so. Twenty-one percent indicated they do not make recommendations because retirees have not asked for them.

According to LIMRA, to the extent that such services are in demand and can be supplied efficiently by plan providers and advisers, there may be more “outsourcing” of distribution advice in the future. This represents an opportunity for valuable interactions with retirees early in the decision-making process.

Among plan sponsors that do provide retiring employees with specific distribution recommendations, only about one-third (31%) suggest rollovers, with the majority recommending installment payments (30%) or annuity payments (26%). Seven percent of plan sponsors recommend retiring employees leave all their money in the plan.

The survey found DC plan sponsors generally recommend and prefer distribution options that keep at least some of the money in the plan (e.g., installment payments), though they will recommend whatever option they deem appropriate for retirees regardless of their own preferences.

Among those sponsors that prefer retirees keep their money in the plan, most add the caveat that balances are at least $5,000 or more; plan sponsors are thus generally not in favor of balances below the involuntary cash-out maximum staying in their defined contribution (DC) plans. Such small balances usually add to the cost of running a plan without appreciably boosting the size of the plan.

LIMRA notes that since the focus of discussions with retiring employees naturally centers on distribution and deployment, it poses a challenge for providers’ stay-in-plan retention strategies. But, this situation may change if regulations make conducting rollovers more burdensome or if required disclosures include more emphasis on the benefits of remaining in the plan, LIMRA says.

LIMRA concludes that if plan sponsors have no clear preference for what retiring employees do with their plan balances, this may present plan providers and advisers with more options for retaining assets, either within the plan or within rollover IRA products.

In Practice August 26, 2014

Retirement Specialist Advisers Do More for Plan Sponsors

Professional retirement plan advisers are central to the strategic direction, administration, and overall performance of the retirement plans they serve, says new research.
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More than six in 10 (61%) retirement plan sponsors with plan assets between $5 million and $500 million work with a financial adviser or consultant who is exclusively or primarily focused on retirement plans, according to a study produced by EACH Enterprise for the benefit of the Retirement Advisor Council and co-sponsored by Fidelity Investments, Franklin Templeton Investments, John Hancock Investments, MassMutual Financial Group, MFS Investment Management, Principal Financial Group, and Transamerica Retirement Solutions. Plan sponsors consistently cite their professional retirement plan advisers as being central to the success of the plans they manage, the research finds.

The study, “The Value of a Professional Retirement Plan Advisor,” defines professional retirement plan advisers as those whose book of business is filled primarily or exclusively with retirement plans. Stig Nybo, president of U.S. retirement strategy at Transamerica Retirement Solutions, says these specialist advisers often earn high marks because they deliver stronger levels of expertise and knowledge about challenging retirement-related issues than generalist investment advisers.

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The study makes the case that retirement specialist advisers do a better job retaining retirement plan clients for the long term than generalist advisers or benefits brokers. More than 80% of plans that partner with an adviser entirely dedicated to retirement plans have worked with their current adviser for at least five years. Strong accomplishments related to boosting plan outcomes and simplifying administration undoubtedly play a role in the length of these relationships, Nybo says.

Another factor is the standard use of a formal request for proposal (RFP) process by sponsors in selecting new retirement plan advisers. The study found that more than 65% of plan sponsors have conducted an RFP search for an adviser for their plan within the last 10 years. Researchers explain that retirement specialists can often demonstrate greater expertise and client service capabilities during the RFP process, allowing them to win and retain business more effectively.

While generalist financial advisers often bring powerful investing knowledge to the table, Nybo says it’s the specialist advisers’ additional ability to simplify plan administration and boost participant outcomes that sets them apart. For example, sponsors appear to be especially interested in hiring advisers who can help implement creative and compliant plan design adjustments, according to the study.

Nybo says specialist advisers are being called on to support everything from changes in the employer match formula to the implementation of automatic enrollment. They are also usually skilled at helping sponsors increase deferral rates through financial wellness education and innovative plan design changes, he adds.

“Importantly, their efforts often translate into measurable improvements in plan performance and retirement outcomes, and the survey results make it clear that plan sponsors recognize the value of partnering with a retirement plan adviser,” Nybo says.

In addition to planning and executing effective plan design changes, specialist advisers also provide better visibility into important plan analytics, according to the research. The study suggests new reporting tools supplied by advisers at the participant and plan level have made it easier for plan sponsors to understand how plan design characteristics impact overall plan performance. A majority of plan sponsors that work with a specialist adviser reported positive results coming out of more advanced technology tools and other adviser support efforts (see “Plan Design Meets Big Data”).

Among those sponsors working with specialist advisers, 76% say more than half their participants are on course to achieve a successful retirement. More than 80% have experienced an improvement in participant deferral rates, and 33% reported a deferral increase of at least 6% in the last two years.

Further, 90% of plan sponsors agree that their specialist adviser simplifies plan administration, and when challenges arise, nearly 60% say they turn to their adviser first in the event of a problem with plan administration.

The researchers also conducted a series of focus group discussions with 14 plan sponsors as part of the study. Fully half of these sponsors indicated they had chosen their current adviser based on the role of the adviser in participant education, communication and financial wellness counseling. The other 50% of plan sponsors based their decision on a range of other factors, including the scope the adviser’s fiduciary services, approach to qualified default investment alternatives in the investment policy, compensation structure, and business affiliation.

The research urges sponsors to consider plan needs and demographics in choosing which criteria will be important during the adviser search. For specialist advisers, it's key to stay on top of plan design innovation and best practices for boosting and measuring participant outcomes. 

The research was conducted by EACH Enterprise, LLC, an independent firm specialized in retirement plan research whose clients include retirement plan service providers and investment managers. EACH Enterprise administered the survey among employers in the private sector (privately-held, exchange-traded, and not-for-profit) with 100 employees or more. Respondents also had 401(k) or 403(b) plan sponsors with plan assets in the $5 million to $500 million range.

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