Research

DATA & RESEARCH | PLANADVISER July 2007

2007 Selling - Where Advisers Add Value

How advisers add value to the retirement plans they serve

By Alison Cooke Mintzer See Archive >

“Why do I need an adviser?’  

Plan sponsors that work with dedicated retirement plan advisers are generally quick to tell you about the impact of that adviser on their job, the participants, and the plan as a whole. But plan sponsors that have never had that experience—or plans that have had the bad experience of working with a “drive by’ adviser that collects their commission and is never heard from again—may have reason to be skeptical.

However, based on the results of proprietary research from the PLANSPONSOR Institute, adviser-led plans have an average participation that is three points higher than those without that support, 71.7%, and have an average deferral rate of 4.8%, compared with 4.4% for plans without. Those findings are drawn from the industry-leading PLANSPONSOR survey of nearly 5,000 plan sponsors nationwide. Indeed, asked to identify the objectives of their ­participant communications and education efforts, plan sponsors working with an adviser noted increasing participation, increasing deferrals, and a better ­diversification of participant investments as priorities.

Investment Options  

Plans that rely on the services of an adviser do not offer participants fewer choices (a median of 15), and their presence does not appear to have much ­impact on the number of funds held by each participant (approximately five). Additionally, plans with an adviser are only slightly more likely to offer ­managed accounts as an investment option (34.4% vs. 31.3%).

Although plans with and without advisers are just as likely to offer ­asset- allocation funds, plans with advisers are more likely to offer ­risk-based lifestyle funds. These funds generally require a little more work and ­communication on the part of an adviser to explain properly what fund a participant should be in, in contrast with target-date funds, where the choice is predicated largely on the participant’s age (or, more accurately, ­retirement date). However, ­asset- allocation funds account for an average of 28% of participant balances in plans with an adviser, versus 22% in other plans. Further, adviser-led plans are more likely to limit the amount of ­employer stock an employee can hold (29.1% vs. 25.0%).

Plans working with an adviser are more likely to have a written ­statement of investment policy for the retirement plan: more than two-thirds (68%) ­compared with just 57.2% of plans without an adviser.

Despite those differences, participants in adviser-led plans, on average, are not outperforming other programs. All plans averaged a 9% return in 2005 and about a 6% return in the first quarter of 2006, though the results at an ­individual participant level might tell a different tale.

Fees Ability?  

Although plan sponsors often look to advisers to help them assess and ­reduce plan fees, a striking 18.4% of plan sponsors working with advisers still say they do not know the annual cost charged against participant accounts as investment management fees, and 14.5% don’t know the annual cost for ­maintaining the plan.

However, asked what attributes they look for in an adviser, plan sponsors were most inclined to cite quality of advice to plan committee and sponsor, quality of advice to plan participants, industry knowledge, independence, and the ability to negotiate on behalf of the plan. Reasonableness of fees and ­transparency of fees were well down the list.

Overall, plan sponsors working with an adviser seem happier with their DC plan provider, and more of those working with an adviser (89.2%) would recommend their DC provider than those without an adviser (87.2%). Further, across the board, when asked to rate all sponsor and participant services ­offered by the DC retirement plan provider, sponsors working with an adviser rate all the services higher than those without, suggesting that an adviser does make a difference in the plan sponsor’s opinion of the plan’s service.

Methodology  

In July 2006, more than 20,000 survey questionnaires were sent to defined contribution (DC) plan sponsors from the PLANSPONSOR magazine database, as well as client lists supplied by DC providers: 4,938 total usable responses were received by the close of the survey on August 31, 2006. The questionnaire included questions on DC plan features, as well as plan sponsor priorities. To get the data for these results, we compared plans that reported using an adviser with those that did not.

For more information on purchasing additional data on DC plans, please contact Quinn Keeler at qkeeler@assetinternational.com.