trendspotting | PLANADVISER November/December 2014


Articles from the Trendspotting section of the magazine

By PLANADVISER Staff | November/December 2014
Art By James Yang

 Advisers Missing Out on Gen Y

Advisers are overlooking opportunities among Generation Y clients, according to The Principal Financial Well-Being Index: Financial Advisors. Less than one-fifth of them (18%) target Gen Y clients, while 57% seek out clients with assets in excess of $250,000.

Even as Millennials are becoming established in their careers, they are still below the radar of most financial advisers, the study says. Instead, three out of five financial advisers surveyed target Baby Boomers (64%), affluent/high-net-worth individuals (64%) or business owners (62%). Overall, only about a third of American workers (30%) consult with a financial adviser.

The findings illustrate an enormous opportunity for up-and-coming advisers to build relationships with underserved Millennials. Younger investors are in a growth phase of their careers and income potential, notes Tim Minard, senior vice president of distribution at The Principal in Des Moines, Iowa.

So what prevents Millennials and other workers from seeking the help of a financial adviser? Nearly a third of the advisers surveyed (29%) reported that potential investors say fees and costs are the biggest barrier, followed by fear (16%) and the belief that they can go it alone (10%).

But help from a financial adviser is definitely needed. Many advisers reported that clients tend to live beyond their means (22%) and do not save enough (15%)—especially early in their careers (11%). The majority of advisers (52%) indicated that no more than one in four clients allows himself enough time to attain the recommended level of retirement savings.

“One of the biggest challenges advisers face is helping clients try to catch up when they didn’t start saving for retirement in the early years of their careers,” Minard adds. “Financial professionals are able to easily demonstrate to clients the power of early savings and the impact that has on their retirement nest egg.”

Outlook on Participants

While 61% of advisers surveyed feel clients are in good shape in terms of planning for how they will turn their retirement savings into retirement income, only one in five (21%) rated their clients highly for readiness to deal financially with becoming disabled and unable to work for a living.

Advisers surveyed found that their biggest competition is not other advisers but participants’ fears, which discourage financial action (34%). Nonetheless, these advisers said 37% of new clients, on average, come to them due to dissatisfaction with a previous financial professional. Only 4% of advisers said they feel threatened by online investment advice providers. 

Retirement Plan Advisers’ Focus
Gen Y18%
Baby Boomers64%
Affluent/High net worth64%
Business owners62%
Clients with balances >$250,00057%

Source: The Principal Financial Well-Being Index: Financial Advisors

Art By Lars Leetaru

DC Participants Slow to Move

Approximately $720 billion in defined contribution (DC) plan assets was eligible for distribution but remained in employer-sponsored plans in 2013, according to a report from analytics firm Cerulli Associates.

This means the assets that remained in employer-sponsored plans are nearly twice as large as the amount of assets that rolled out last year, according to Chris Nadai, a senior analyst at Cerulli in Boston.

“The fact that a majority of assets eligible for distribution remain in-plan each year indicates that many 401(k) participants are hesitant to take action with their prior accounts,” Nadai says. “This is a great opportunity for financial advisers and recordkeepers to inquire about [participants’] prior employment history in order to determine whether there are abandoned accounts.”

Cerulli claims that the majority of money exiting employer-sponsored defined contribution plans has rolled over to either an individual retirement account (IRA) or a new employer plan, and the rest was taken as a cash distribution to initiate an indirect rollover, to satisfy a required minimum distribution (RMD) or for cash.

The research report from Cerulli, “Evolution of the Retirement Investor 2014: Understanding 401(k) Participant Behavior and Trends in IRAs, Rollovers and Retirement Income,” also examines decisions individual investors made about retirement throughout their lifecycle of planning for it, with particular emphasis on 401(k) plan participants. Cerulli says it expects that annual distributions and rollovers will grow from 401(k) participants over the next five years as increasingly large numbers of Baby Boomers reach retirement age.

Researchers suggest this represents a big opportunity for advisers, recordkeepers and brokerage firms. Establishing a relationship with retirement plan participants is essential for recordkeepers and IRA providers, Nadai continues. “One of the major advantages recordkeepers have in capturing rollovers is that they can be in immediate contact with a participant when there is a change in his work or personal life.”

Taking advantage of these trends will require advisers and service providers to shift away from a sole retirement planning focus and to direct additional attention to personalized financial planning as well. Many individuals are not exclusively concerned about retirement, Cerulli notes. Instead, they need advice about buying a house, reducing debt, saving for a child’s education or other financial issues. According to Cerulli, advisers and recordkeepers are in a position to be the main source of this advice.

The report also argues that advisers and recordkeepers can serve their clients well by working to keep assets within the 401(k) market, due to the competitive benefits of employer-sponsored plans over IRAs. 

Annuities in TDFs

Flows to target-date funds (TDFs) year to date through October 14 were $45.4 billion, bringing total assets in the funds to $690.7 billion, according to Strategic Insight, an Asset International company. Given new guidance from the Department of Labor (DOL) and the Internal Revenue Service (IRS) permitting target-dates in 401(k) plans to integrate annuities while retaining qualified default investment alternative (QDIA) status, the fast-growing investment class is poised for change—and more growth.

Under the October DOL and IRS guidance, target-date funds may include annuities as part of their fixed-income holdings, and the annuities may provide payments to the shareholder either immediately upon retirement or at a later time.

“As [Baby] Boomers approach retirement and life expectancies increase, income annuities can be an important planning tool for a secure retirement,” explains Mark Iwry, a senior adviser to the secretary of the Treasury, and deputy assistant secretary for retirement and health policy—also at the Treasury—in Washington. “Treasury is working to expand the availability of retirement income options for working families. By encouraging the use of income annuities, today’s guidance can help retirees protect themselves from outliving their savings.”

This development comes on the heels of final rules on the use of longevity annuities in 401(k) plans and individual retirement accounts (IRAs) that the Treasury and IRS issued in July.

Several industry groups responded favorably to the new regulations to permit annuities in defined contribution (DC) plans. The Institutional Retirement Income Council (IRIC), for example, called the guidance an “important step to promote retirement security.” IRIC President William Charyk said the council “is pleased with the additional guidance that the Internal Revenue Service and Department of Labor have issued on retirement income strategies in qualified plans. [The guidance] can provide significant comfort to plan sponsors [that] would like to offer a deferred annuity feature as part of their target-date fund lineup. IRIC appreciates both agencies’ attention to the practical concerns of plan sponsors [concerning safe harbor] and looks forward to the release of continued practical guidance from the government to assist the aging population in addressing their retirement needs.”

Likewise, the Insured Retirement Institute (IRI) expressed thanks that the “Treasury continued to support lifetime income retirement plans.” According to IRI President and CEO Cathy Weatherford, “By continuing to break down access barriers and providing plan sponsors with this clear guidance, the Treasury Department is acknowledging the important part annuities have in helping Americans attain financial security in retirement.”

As to how a target-date fund might make use of an annuity in its lineup, S. Derrin Watson, an attorney with SunGard, says the fund could potentially begin moving assets from equities to fixed income when an investor nears retirement—say, at age 55. At retirement, the fund manager would issue an individual annuity or a certificate for a group annuity to the participant, leaving the remaining funds invested in the TDF, Watson says. However, he notes, insurance companies will not issue annuities to investors without knowing their age, so a target-date fund that includes an annuity in its lineup would adhere to these rules.

“The DOL also said the TDFs would qualify for safe harbor from liability against a participant claim provided by the QDIA requirements, as long as there is nothing inherent in the annuity that would disqualify it,” he says. Nonetheless, he adds, the plan sponsor retains the fiduciary responsibility to prudently select the TDF manager.

Top 10 Target-Date Fund Managers by YTD Net Flows
(Year to date through October 14)

2T. Rowe Price$12,987mm
3J.P. Morgan Funds$7,410mm
4American Funds$4,907mm
5Callan Associates$3,928mm
7Principal Funds$1,466mm
8American Century$1,125mm
9John Hancock Investments$876mm
10State Farm$793mm

Source: Strategic Insight


Top 10 Target-Date Fund Managers by AUM
(As of October 14)

3T. Rowe Price$125,221mm
4Principal Funds$28,183mm
5J.P. Morgan Funds$27,692mm
6American Funds$24,844mm
8Wells Fargo$16,706mm
9John Hancock Investments$14,827mm
10American Century$11,975mm

Source: Strategic Insight

Art By Jun Cen

Going It Alone

Independent retirement plan advisers,­ lacking the benefit of a large internal support network, must leverage third-party service providers to achieve scale and combat business challenges.

“Some people want a big name attached to their adviser,” said Thom Shumosic, founder of MidAtlantic Retirement Planning Specialists, headquartered in Wilmington, Delaware. “We’re different, and we do things differently.”

While their companies may not have the resources of a large support network, Shumosic and Joe Connell, president of Retirement Plan Partners Inc. in Maple Grove, Minnesota, are able to foster existing client relationships, cultivate new client engagements, oversee advisers and improve retirement programs by using strategies they suggest to other small adviser practices, too.

Shumosic and Connell say interns are an excellent resource. The advisers also encourage small independent firms to leverage any support services made available by their larger partners. For example, an independent adviser could enroll in continuing education courses with an investment provider. Recordkeepers can be especially effective partners; they often can take over a plan’s participant communications program or other key administrative tasks. This makes the adviser more efficient and effective and helps ensure that full value is extracted from the service provider relationships.

Small or single-adviser firms can also consider partnering with defined contribution investment only (DCIO) wholesalers. An adviser can leverage the DCIO wholesaler’s expertise on subjects such as due diligence and practice management. In fact, PLANADVISER’s 2014 DCIO Survey shows industry research and business intelligence are also commonly offered by DCIO providers, along with training for defined contribution (DC) plan sales and support in investment committee meetings.

Shumosic and Connell suggest that DCIO wholesalers can be used to service existing plan obligations or during the client prospecting and onboarding process.

The experts stress the importance of balancing time spent on prospecting new clients and on servicing current ones. Prospecting should be performed with referrals from reliable sources and centers of influence—often Employee Retirement Income Security Act (ERISA) attorneys or certified public accountants (CPAs). Leveraging CPA firms is beneficial for clients as well, bringing a more holistic financial-planning experience.

A balance between looking for new clients and maintaining services for existing ones can be achieved by adhering to a strict and formal schedule, these two advisers say. They also encourage independents to keep up with their fiduciary training.

The men attest that there are numerous advantages to being small and independent. Perhaps most important, they say, these advisers can easily offer a sense of exclusivity to clients eager for individualized attention.