- Created: Wednesday, 17 October 2018 21:05
It's no secret that profit margins in the defined contribution and asset management businesses are under tremendous pressure. Plan administrators have been running on fumes (i.e. microscopic margins) for years, which means they will do whatever they can to deflect the pressure elsewhere. Asset management and plan consultant services are bearing the brunt of the changes.
As part of our latest research effort, Sway Research surveyed just over 200 DC plan consultants, including those at firms that specialize in employer-benefits and those who have both a large wealth management practice and a substantial book of DC plans. We asked this group to rate their level of agreement with the following statement:
I/we have experienced substantial fee compression in the DC plans we sell and service.
As shown in the accompanying exhibit, 49% of respondents agreed, 8% of whom did so strongly, while just 19% disagreed. So, what is the impact of fee compression to these practices? Well for one thing, an even greater percentage of respondents agreed with this next statement:
Fee compression is negatively impacting our revenues and thus the growth of our practice.
Nearly three in five respondents share experiencing revenue erosion resulting from the downward pressure on DC plan fees, which is impacting the ability to grow. Nearly a quarter are in strong agreement, suggesting this is a significant issue for these plan consultants.
What are some logical responses to this issue? Well, clearly one way to deal with this is to deflect the fee cuts towards the investment providers. Some margins left in this business are held by asset managers, particularly active managers. Thus, there's the recent rush to bring more passively investments into DC plan menus, which has also been spurred on by the litigious environments surrounding plan menus and investment selection. In fact, more than half (53%) of DC Plan consultants say they are increasing usage of passive options in plans, even though more than a third of their DC plan AUA are already held in passive products.
Another area ripe for cost cutting is in investment vehicle (i.e., shifting from higher-cost mutual funds to lower cost collectives). This year, two in five survey respondents acknowledge ramping their use of CITs in DC plans as well. The level is even higher among consultants who focus on plans in the $20M to $50M range.
But, wringing out fees from investments can only go on for so long, before there's nothing left to cut, and only a few asset managers are left standing. A world with only Vanguard and BlackRock may make for easier decision-making when it comes to populating investment menus, but plan consultants will have lost more than a much wider array of investments from which to choose. If it comes to this, plan consultants will have also lost many of their key allies in growing a DC plans business.
Each year, in addition to surveying plan consultants, Sway surveys the DCIO sales leaders of approximately 30 leading asset managers. And, each year when asked about their top-priorities for investment, these executives place the development of value-support programs and services for plan consultants near or at the top of their list. The only area ahead of this is usually staffing, which is mostly internal and external DCIO representatives who are tasked with supporting plan consultants. With asset management becoming increasingly commoditized, the value-add side of the equation, whether delivered through the market knowledge and expertise of staff, or via tools and programs designed to help plan consultant's prospect for, and close, more business, these services are a tremendous aid not only to plan intermediaries, but plan sponsors and participants as well.
Whether its tools to analyze the performance and suitability of a plan administrator or Target-Date series, staying up to speed on the regulatory front, or enhancing the understanding of plan profitability, DCIO sales and marketing units provide tremendous amount of value to plan consultants. So, keep this in mind the next time you're filling out a plan menu. Saving a few basis points by switching from active to passive management may seem like the best move in the short-run, but at what cost in the long-run? Selling and supporting plan sponsors and participants requires a great deal of investment from a wide range of parties, and when there's only a couple left standing-a couple who are essentially giving away their services to win the business-there may be no one left to help you grow yours.
Chris J. Brown,
Founder and Principal Sway Research
For more information about Sway Research, visit www.swayresearch.com
An extensive discussion of the fiduciary rules proposed by the U.S. Department of Labor (DOL) was a highlight of day two of the semi-annual meeting. Members in all colleges engaged in the discussion of the upcoming announcement of revised rules. Many expressed concern that new rules may limit options for sponsors and participants. Participant education, participant counseling, asset gathering, asset retention, retirement counseling, and even the mention of an investment option may automatically qualify the plan advisor, and perhaps also the plan service provider as a fiduciary to the plan and to the participant. These limitations are poised to impede client service.
In particular, rules may reduce the availability of participant education and communication materials, as it is expected that any mention of a “product” such as a fund name will automatically trigger the new fiduciary definition. What’s more, some anticipate the DOL will require compliance with the new rules within eight months, a compressed schedule that is just not feasible to change hundreds of thousands of plans. Two years is needed if most plans need new contracts. That is a costly and time-consuming endeavor.
Plan Advisors typically have access to tremendous amounts of data about client plans, participants, and investment markets. However, there is only so much information clients can absorb to support decision making. For this reason, plan advisors need to determine the most important data sets and how to leverage these data points in client conversations. Simply put, advisors need to determine how they want to convey information, and—more importantly—what sponsors and participants want and need to see to support decision-making.
Advisors, plan sponsors, and their participants can also benefit from convenient video conferencing solutions. Video solutions provide scale and greater geographic reach. Video conferencing personalizes the individual on the other end of the phone, and compels both presenter and audience to be much more attentive to the content. The technology to leverage video conferences, save big money on travel, and streamline business is increasingly available, convenient, and reliable. Video conferencing is just one of the many solutions enhancing plan effectiveness. Mobile technology (tablets and handheld devices) is another area of innovation enhancing effectiveness. The bottom line is that “user experience” is all about presenting people with the information they need in the format they prefer, when and where they need it. Advisor success hinges on the ability to understand the needs of the audience before preparing tablet or paper reports for the next meeting. In many cases, a video conference can be just as effective as an in-person meeting.
Technological innovations that impact Advisor effectiveness also encompass a wide variety of social media. Compliance requirements are often a challenge for Advisors seeking to leverage social media to enhance effectiveness. To get started, an Advisor may act as a ‘net consumer’ of social media (think “read only” rather than active posting), and simply listen before joining the conversation. A series of Google Alerts with words and phrases to follow companies, stocks, or even topics is a good way to start and be notified instantly or, receive a daily email digest of happenings. One suggestion is to track all of client sponsors and prospects. Updates about the competition and industry help as well. Other programs that aggregate listening (or posting) include Hoot Suite and Social Mention.
Council activities are not limited to in-person meetings. Meetings are the source of ideas and initiatives, but activity extends to conference calls, committees, public relations campaigns, research, comments to regulators, maintenance of the advisor search RFP template, and others needed to support enhanced retirement outcomes for working Americans.
Next month, the DOL is widely expected to issue the revised copy of its proposed rule seeking to redefine the term "fiduciary" with a focus on conflicts of interest. The rule aims to eliminate conflicts of interest and to establish a fiduciary standard with participants’ best interests at heart. The initial proposal was revolutionary in a number of ways. In addition to attempting to establish an overall fiduciary standard, the bill also proposed language that may require the plan advisor and the service provider to act as fiduciaries if investments were mentioned. This in turn may impact employee education and communication.
The main objections are that small employers, who typically buy retirement plans through broker/dealers, will have limited choices because the cost of compliance with the rules (best interest contract) will reduce the number of advisors who are able to offer these services. Those who are still able to offer retirement plan guidance will likely reduce the amount of investment education and communication for participants.
Not all the news is negative. The rule presents an opportunity for registered investment advisors and investment advisor representatives who are entirely dedicated to offering retirement plans. The challenge for them may be in the level of fiduciary responsibility that comes from gathering assets from outside plans. Other challenges include:
All of these issues may result in the emergence of entities – spun off by service providers - entirely dedicated to communication, education, and advice of retirement plan participants which could be compensated with a flat fee-for-service arrangement.
In the end this may drive further consolidation of retirement plan recordkeepers and undoubtedly reduce coverage. Two bills were introduced in the house in December that would establish a “best interest” standard for advice given to qualified plans and IRAs. They would block the DOL from amending the existing definition of fiduciary while adopting many of the proposed DOL changes, but adoption by both chambers is unlikely.
We will continue to keep you apprised of the latest developments and we will dedicate time at the annual meeting in June to discuss the status. In the meantime, be ready to flex your business model!!
President Barack Obama released his 2017 proposed budget on February 9. Among the $4.1 trillion dollar initiatives were two pieces of funding that could impact the retirement community.
The 2017 budget is in for a tumultuous journey in this election year. Considering that the 2016 budget did not get passed until close to the end of 2015, it is likely that this budget will not be taken seriously until after the elections in November, 2016. More updates on this budget will be posted as they surface.
At the Semi-Annual Meeting hosted by LPL Financial in sunny San Diego, CA, the Council dug deep into the issues facing retirement plan advisors in 2016. This meeting’s theme - The Wild, Wild West…A Moving Frontier for Retirement Plan Stewards - captures the sentiment shared by many advisors that the industry is evolving at a fast pace. Getting together live provides attendees with the opportunity to share directly with their peers and compare experiences with plan providers, investment managers, practice leaders and others in the industry.
The Council has grown to include 89 financial advisors, 12 retirement practice leaders, 10 recordkeeping service providers, and 14 investment management firms who each bring a unique perspective on retirement plans. The collegial mix makes for lively panel discussions, breakout peer groups, and one-on-one exchanges. Following is a brief description of the most prominent topics and discussion points from the meeting’s first day:
“Independent” Advisors Advance
The role of Registered Investment Advisors (RIAs) in the Retirement Plans space continues to grow. Many plan sponsors appreciate the independence of an RIA who does not have ties to a specific retirement plan provider, investment manager, or insurance company. Advice from “independent” Advisors is perceived as unbiased. One speaker pointed out RIAs have created 10,000 job opportunities and bring to the market a sense of independence, opportunity, and a level of client service in high demand among plan sponsors. Going one step further, opportunities for RIAs abound at the participant level. Managed accounts represent only a small portion of retirement plan assets and a whopping $23 trillion sit outside managed accounts.
Rise of the Machines
Are plan advisors competing with Robo Advisors? Robo advisors - automated investment advice vehicles - are gaining popularity particularly among members of Generation Now, but cannot replace the sentient touch of a living advisor who can take more into account than a simple program or algorithm can. Advisors continue to educate plan sponsors about their value and need to constantly demonstrate how much farther the personal touch can go when competing against automated solutions.
A Holistic Approach to Employee Finances
Plan sponsors are asking for more when it comes to employee education. Financial wellness is gaining popularity as a discipline, covering employer-sponsored retirement plans and education about consumer debt, savings outside of an employer plan, and anything that can impact employees’ overall financial future. Other topics include estate planning, tax planning, and how to be a prudent consumer.
Retirement By the Dashboard Light
Plan sponsor thirsty for knowledge about their retirement plans is not easily quenched, but many refuse to drink from the fire hose. As an alternative to the voluminous 50-page reports offered by some plan providers and advisors, sponsors are asking for simple “Dashboard” reports. These can illustrate the state of their retirement plan at a glance: plan performance, plan health, investment fund indicators, or any number of topics. Sponsors are asking for an easy-to-read summary aka dashboard, and also the ability to drill down to a deeper level if they want more info about anything shown at the highest level.
The younger generations will become the wealth holders of tomorrow. For this reason, many advisors focus their attention on reaching clients while they’re still young. This next generation, dubbed Generation Now is described as those who are 30-45 years old now. There’s a myth that younger folks just want everything online, but when making financial decisions they almost always go back to mom and dad (take that, Robo Advisors).
This group currently control $3.5 trillion in investable assets, but by 2050 they will likely be the beneficiaries of $16 trillion in wealth. This group will control the lion’s share of investing in the future. To attract younger clients, firms are exploring: lowered asset minimums, bringing younger advisors in to help them connect with younger clients, and integrating the latest technology.
Show, Don’t Tell
Providing clients and prospects with case studies is an excellent way for plan advisors to demonstrate the value they’ve brought to other clients, especially when the case-in-point client shares characteristics of the client or prospect the advisor is hoping to impress. The advisors at the conference who’ve used case studies uniformly tout the benefit of providing this kind of detailed ‘proof’ to clients of both their capabilities and client successes. The Council currently features two case studies on the website, with several more to follow in 2016 representing the broad range of Advisors in Council membership.
Over the past quarter-century, plan sponsors, their advisors and retirement plan recordkeepers have invested hundreds of millions of dollars to educate the workforce about the benefits of participating in a 401(k) plan. However, despite these extensive efforts, the results have yet to substantially improve the retirement readiness of working Americans. Why?
One reason is that they have failed to consider the financial literacy needs of employees as well as their level of financial stress, and the two go hand in hand. If employees don't do basic budgeting, then they may never be financially healthy enough to be able to save money regularly and ramp up these contribution levels over time.
When creating an effective financial education curriculum for your plan participants, get back to basics: Make sure you meet the basic financial literacy needs of plan participants. Here are some key elements of financial literacy to include:
1 – Think and act long term - Like taking a healthy long-term approach to diet and exercise, financial success comes to those who incorporate healthy habits into their lifestyle rather than opt for the latest crash diet or gimmicky exercise fad. Teach participants how to create a long-term strategy in support of life-long goals as well as how to track monthly spending and income. This can help them free up money that could be channeled towards those big, potentially daunting goals.
By getting participants to focus on the big picture, you can help them resist such dangerous distractions as chasing hot-performing investments and overreacting to short-term market "noise."
2 – Time is on their side - Participants need to know that one of their most powerful allies is time. Starting at age 25 can make things so much easier than waiting a decade and having to play catch-up. For example, by saving $5,000 a year at an annual return of 6%, a 25-year-old could hypothetically accumulate $820,238 by age 65, a 40-year span of compound earnings. Even if the individual stopped contributing new money after age 35, he would have $69,858 after 10 years, which would then grow to $401,229 without adding a single dollar afterwards.
Compare this with the cost of waiting 10 years. A 35 year old contributing the same amount over the remaining 30 years to age 65 would accumulate $419,008. The cost of waiting the 10 years to begin to contribute to retirement savings is $401,229. Another way to look at this is that the person who contributed from age 25 to 35 would end up with more than $400,000 by saving just $50,000, while the one who saves $150,000 over the remaining 30 years would end up with about the same amount. Who would get more bang from their savings buck?
These types of illustrations can bring home to young plan participants how important it is to contribute now and not wait a moment longer.
3 – Understand investing basics - Participants don't need to be sophisticated investors, but they do need to know the basics. They should be comfortable with asset allocation, comparing investment performance with the right benchmark, knowing the difference between actively managed and passive investments, understanding mutual fund expense ratios, and emphasizing long-term performance over short-term returns.
By helping participants understand the basic building blocks of investing, you can help to empower them to make their own investment decisions and to be able to track their fund and portfolio performance against the relevant benchmarks, rebalance their asset allocation as needed from time to time, and monitor their progress towards their retirement savings goals.
4 – Beware the pitfalls of plan loans and in-service withdrawals - One important area where we need to do a better job is in educating participants about the dangers and costs of plan loans and in-service withdrawals as well as the long-term costs of cashing out of a plan rather than rolling it over and keeping it in a tax-deferred account when they leave a job.
The pitfalls include opportunity costs of lost potential earnings when the money is absent from the account and not generating compound returns as well as potential taxes and penalties if permanently withdrawn or owed when an employee leaves a place of employment.
The costs to our society of having a generation of workers who aren't financially ready to retire when they arrive at retirement age could be devastating. The costs to individuals who can't afford to retire or who have to make serious financial sacrifices through retirement can be heartbreaking. We need to work together to make sure that doesn't happen. We simply need to do a better job educating our plan participants.
This nation's financial literacy statistics are startling, as are the consequences.
This is all stark evidence that we desperately need more comprehensive and mandatory financial literacy. Teenagers and young adults need to learn basic financial literacy skills, including saving, budgeting, and credit management, so they can take on the many financial challenges that await them.
So, what's the answer? While workplace education on money management and retirement planning are important, so much more needs to be done at an earlier age. We need to educate our young people BEFORE they enter the workforce –– before they're earning and managing (or mismanaging) their money. We have to do a thorough job of equipping high school students with practical financial life skills.
Fortunately, vital financial education is being shared through several popular programs targeted at our youth. These include:
Boys & Girls Club: This service organization has a "Money Matter$" program for 13 – 18 year olds. Teens learn financial responsibility and independence by learning how to manage a checking account, balance a budget, save and invest, start a small business and pay for college. Money Matters
Junior Achievement: This national organization is a leader in promoting workforce readiness, entrepreneurship and financial literacy through hands-on programs. JA Personal Finance
Jump$tart Coalition for Personal Financial Literacy: This national non-profit coalition seeks to educate and prepare U.S. youth for life-long financial success. Jump$tart
Make a Difference Wisconsin: This statewide program provides financial literacy programs and resources that empower children to make sound financial decisions. www.makeadifferencewisconsin.org
Credit for Life: This intense, practical program of Boston College High School has received rave reviews. In a single day fair, hundreds of students receive in-depth exposure to financial literacy with a focus on budgeting and saving through 401(k) plans. Credit for Life
For that one day, each high school senior gets to choose an occupation. Then, based on official Bureau of Labor Statistics data, they each receive an annual income and are assigned a certain amount of student debt and a random credit score. With that information and the resultant opportunities and restrictions, they make real-life types of decisions about their retirement plan, loan payments and the costs and merits of buying every-day items.
For example, students have to weigh choices of apartment rentals, car purchase, insurance, utilities, cell phone plans and how much they're able to set aside and save in their simulated monthly budgets. There's even a reality-check station where, like a game of Monopoly, they might get a Fortune card that says: "Speeding ticket – $150" or "You've inherited $500." So, it's educational and fun. And like life, it can be unpredictable.
Throughout the day, students learn the basics of financial management through a series of quick, 15-minute workshops, including a 401(k) information session. That drives home the message that all workers are responsible for their own retirement, and starting sooner can make a big difference.
At Boston College High School last year, the level of engagement among seniors was very high. They actively sought help, asking plenty of follow-up questions to program advisors. The retirement saving and investing booth was among the most popular.
These are wonderful programs. We're moving in the right direction. But we need more. We need mandatory financial literacy as part of the high school curriculum. Let's push to triple the number of states that require it, from the current 16. If students in Ohio and New Jersey must be financially knowledgeable when they graduate from high school, why should students in Wisconsin and New York State, for example, be denied that vital skill?
We all know about the sorry state of financial preparedness in our society and our workforce. Too few people are successfully managing their monthly budgets and financial future. Let's do something meaningful and far-reaching. Let's make financial literacy mandatory.
What can YOU do about it?
First, find out if local schools are doing anything like this. If not, find out who could be a good resource to help set one up.
Second, volunteer to help plan such an event and to make financial presentations that will help equip today's students for a lifetime of financial success. Ask your financial advisor how s/he will support the event.
Third, contact your state officials, particularly the secretary of education, to push to make financial literacy a mandatory requirement within the high school curriculum.
Financial literacy: We can all pay it forward. Let's start today.
Although Americans are being asked to bear more responsibility for their retirement, many lack the financial literacy skills or interest to answer the most vital questions, such as: “How much should I contribute? In what options should I invest? How much money will I need in retirement? And how will I manage the many financial risks I’ll face as a retiree?”
Solutions to the retirement readiness challenge usually take one of two directions: the improvement of education or the implementation of automated features in retirement plan design. Globally, myriad solutions have emerged: from mandatory participation in an employer’s defined contribution (DC) plan to auto-enrollment of employees into the DC plan, to voluntary DC/DB (defined benefit) and hybrid elements.
Plan design is critically important, but it won’t address the broader societal problem of poor financial literacy. The shifting risk from DB to DC — from employers to employees — shines a spotlight on a far greater problem than the retirement readiness challenge: basic financial illiteracy.
Workplace initiatives needed
We need to improve the financial literacy of working adults. Essential efforts are already being made to improve financial literacy among students, but we also need forward-thinking initiatives specifically designed to help our current workforce make better financial decisions. This applies to retirement planning and saving as well as other aspects of financial life. The two phases in everyone’s financial life –– retirement and non-retirement –– while seemingly distinct, affect one another profoundly.
For instance, workers who use payday loans are less likely to contribute to their retirement plans. How can we expect our messages to succeed in directing plan participants to boost their retirement contribution levels when young adults typically enter the workforce saddled with student loan debt? And how can those messages lead to the desired behaviors when plan participants don’t have a solid grasp of financial planning and budgeting concepts?
Many employees need help just to understand budgeting basics, which is fundamental for their current and future financial well-being. How can individuals be expected to set aside enough money to save properly for retirement, or manage their money in retirement, when they haven’t mastered how to make sure that income spent each month doesn’t exceed income earned?
Adults need guidance on how to gain control of their monthly spending habits and how to confront our commercial world by determining wants versus needs.
This lack of basic understanding and financial self-control has fed a booming payday loan industry that, as noted above, presents an obstacle to broader retirement plan participation.
We need to do more to help our workers understand and manage all aspects of their finances better. That’s a crucial first step in helping to improve retirement readiness and promote successful lifelong personal financial management.
Look for continuation of this blog series discussing adult financial illiteracy. We welcome you to share your ideas for better financial futures.
Drafting comments to the Department of Labor over the last month, I reflected on the factors that might have inspired sensible regulators to be so focused on price as to conceive the idea of a guide to accompany lengthier 408(b)(2) disclosures. I have come to the conclusion that the culture of Cheap that has become dominant since 2008 is partly to blame. Necessity has brought millions to share the belief that cheap is good. Eager to cater to an audience struggling with declining personal incomes, opinion leaders in the media and policymaking circles reinforced the notion in articles, public speeches, blogs, and social media posts. The show Extreme Cheapskate televised on TLC epitomizes the cultural wave. Imbued by the dominant culture, many American workers accept it as self-evident that cheap is good.
To some extent, the retirement plans industry benefits of cheapskates’ rise in popularity. The allure of conspicuous consumption impeded babyboomers’ ability to achieve retirement success en masse. When tightwads are hip and saving is in, money flows to retirement coffers more readily. Millennials appear on track to achieve retirement success in greater numbers. It behooves the industry to make this trend a lasting one. However, it is important that we not get enitrely caught up in the cultural trend. Cheap comes at a price. Often, cheap is in bad taste; or cheap breaks down easily. There are reasons why employers should not buy their retirement plan services on Craigslist or at the Goodwill store. Plan fiduciaries have an obligation to ensure compensation paid for services provided is reasonable, but they also must act prudently in the interest of participants.
Emphasizing cost and downplaying benefits in the content of disclosures affects plan sponsors’ choice architecture at the detriment of American workers’ retirement success. A retirement plan decision maker’s obsession to achieve everyday low cost can affect retirement readiness in undesirable ways. The urge to cut corners may lead to reductions in services such as participant counseling or in-person plan reviews that undermine the effectiveness of the national retirement system. Keeping policy makers (regulator or lawmaker) and decision makers (plan sponsor, committee member, advisor, legal counsel, service provider, or investment manager) focused on acting with prudence is critical to the integrity of the system.