2008 Selling - Added Value

How advisers are making a difference

By Alison Cooke Mintzer See Archive >

What is the value of a financial adviser to a retirement plan? To a plan sponsor? To the participants? In many ways, the satisfaction and comfort a plan adviser brings to the plan sponsor cannot be measured. However, there are many ways in which the adviser’s contribution can be measured.

More than half (55.2%) of the 5,490 plans responding to PLANADVISER’s sister publication PLANSPONSOR’s 11th annual Defined Contribution Survey rely on the services of a financial adviser, and that involvement appears to have a positive impact on the overall relationship with the plan’s operation. Those plan sponsors working with an adviser were more likely to recommend their DC provider than those who had a direct operating relationship (90.7% positive, versus 88.5%). Asked to rate all sponsor and participant services offered by their DC retirement plan provider, those plan sponsors working with an adviser rated all services higher than those who had no adviser involvement. Plan sponsors that worked with a financial adviser also were inclined to give their DC provider a higher responsiveness score.

Yet, compared with a year ago, the difference in plan performance on key areas—such as participation rates, deferral amounts, and asset-allocation alternatives—was almost nonexistent. Consider that plans responding to this year’s survey reported median participation rates of 80%, for both adviser-supported and non-adviser-supported plans. The average participation rate at plans with an adviser is 74.8%, marginally better than the 74.2% reported by plans without such assistance. Consider also that, while a quarter of plans without an adviser have adopted automatic enrollment, a smaller 22.5% of those with advisers have. Those with an adviser were, however, more likely to adopt the provision for all workers, rather than just prospectively, by a margin of 36% to 32.9%. Regardless, the vast majority of plans (both with and without an adviser) said the reason they implemented such a design was because “our organization wanted to be more proactive in helping employees save."

The default deferral rate is most commonly 3% across all plans and it appears that the same number of employees opted out across all plans as well (median of 3% and an average of between 7% and 8%).

Investment Influence

Programs that rely on an adviser were less likely to have employer stock and, though such designs are sometimes touted by advisers, also less likely to have a self-directed brokerage account or managed account on their investment menu. Plans with advisers are more likely than those without to use alternative investments (including hedge funds, venture capital, and private equity), and exchange-traded funds (ETFs). Adviser-supported programs were more likely to review formally the plan investment options more frequently; nearly a third (31.6%) doing so quarterly compared with 27.9% of other programs.

Although lifecycle, or target-date, funds continue to be more popular on survey respondents’ menus than their risk-based counterparts, plans with advisers are more likely to offer risk-based lifestyle funds—mirroring a tendency evidenced in last year’s survey. Of course, risk-based offerings generally require a little more work and communication on the part of an adviser to evaluate properly the option best suited for a participant’s individual situation and risk-tolerance, unlike target-date funds that frequently are determined solely based on a participant’s age. A full quarter (24.8%) of plans with an adviser include risk-based lifestyle funds in their plan lineup, compared to one-fifth (20.6%) of plans without. Not that target-date funds are not popular on the menus of adviser-supported plans; they were reported by 86.9% of plans with an adviser, nearly identical to the 87.3% of other programs. Adviser-led plans that had those asset-allocation solutions on the menu had a higher percentage of participant balances taking advantage of them; both the average (22.7%) and median (15%) of participant balances in asset-allocation (both lifestyle and lifecycle) funds were higher than at plans without adviser support (18.7% and 13%, respectively).

When selecting asset-allocation funds for their plan, all plans look at investment performance first, but plans using an adviser rely on their financial adviser’s recommendation second, followed by risk profile. Those plans without adviser support rely on the risk profile and the reputation of the fund family, in that order.

When it comes to safeguarding a plan sponsor’s fiduciary responsibility, plans working with an adviser are more likely to have a written statement of investment policy for the retirement plan—about three-quarters (74.4%) compared to just 70.5% of plans without an adviser. Consider also that, in our 2006 survey, just 57% of plans without an adviser had an IPS, while 68% of adviser-led plans had that document. Ironically, plans without an adviser were more likely to agree with the statement that they are “very vigilant about monitoring compliance with the IPS" than are plans with an adviser, which—perhaps being more aware of their responsibilities, or perhaps being willing to rely on the expertise and involvement of their adviser—were more likely to say they were merely “moderately vigilant." That apparent modesty notwithstanding, plan sponsors who work with an adviser were more likely to say they monitor investment options quarterly (31.6%) or twice per year (17.6%) than those without such support (27.9% and 16.5%, respectively).

Value Added

A little more than half of plan sponsors (52.8%) say their adviser is paid as a percentage of plan assets (measured in basis points), something that undoubtedly will need to be examined more closely as the Department of Labor’s fee and disclosure initiatives continue (see pages 54 and 63). The next most common fee arrangement is a monthly or annual retainer (21.8%), followed by per-participant fees (10.3%). Although most plan sponsors report evaluating their costs and fees annually, plan sponsors working with advisers are slightly less likely to evaluate their fees on an annual basis, instead tending toward a one- to two-year cycle.

Plan sponsors value the service, consistency, and commitment of their advisers. In fact, 64.9% of plan sponsors responding to our survey say their adviser “delivers excellent value for the price we pay." Advisers clearly have raised the bar—and the Pension Protection Act’s structure for automatic plan designs will only serve to accelerate the pace. Good advisers will keep up, of course—but the best, as they always have, will be the ones setting new standards that stand above the pack.

In July and August 2007, approximately 24,259 survey questionnaires were sent to defined contribution (DC) plan sponsors from the PLANSPONSOR magazine database, as well as client lists supplied by DC providers; 5,490 total usable responses were received by the close of the survey on September 10, 2007. The questionnaire included questions on DC plan features, as well as plan sponsor preferences. To get the data for these results, we compared the questionnaires of plans that reported using an adviser with those that do not.

Does your plan use the services of a financial adviser?
Overall Micro Small Mid Large
Yes 55.2% 60% 57.1% 50.9% 45.2%
No 44.8% 40% 42.9% 49.1% 54.8%
What is the adviser’s fee arrangement?
Overall Micro Small Mid Large
% of plan assets (bps) 52.8% 35.7% 52.8% 44.1% 36.3%
Per participant 10.3% 21.4% 10.1% 5.4% 10.4%
Project-based 5.2% 0.0% 5.3% 9.5% 10.4%
Monthly/annual retainer 21.8% 14.3% 22.0% 35.1% 43.8%
Investments performance 5.2% 0.0% 5.2% 2.7% 2.5%
Participation performance 1.6% 0.0% 1.6% 1.4% 1.7%
Other 9.5% 35.7% 9.3% 8.1% 7.5%
What value are you getting for the products and services from the adviser?
Overall Micro Small Mid Large
Excellent value 64.9% 70.0% 64.9% 66.1% 59.7%
Good, room for improvement 29.3% 30.0% 29.3% 31.3% 35.8%
Only the minimum value 4.0% 0.0% 4.1% 2.6% 4.1%
Does not add value 1.7% 0.0% 1.8% 0.0% 0.4%
What are the total DC plan assets?
adviser No adviser
<$5mm 34.6% 28.4%
$5mm – $50mm 49.0% 36.2%
$50mm – $200mm 12.9% 15.4%
$200mm – $500mm 6.2% 8.6%
$500mm – $1b 2.9% 4.0%
>$1b 4.4% 7.5%
How many participants are in your DC plan?
adviser No adviser
<100 33.1% 26.9%
100–499 32.3% 31.1%
500–999 10.3% 9.9%
1,000–4,999 15.9% 17.5%
5,000–9,999 3.8% 6.4%
> 10,000 4.6% 8.1%
Please rate your DC provider’s participant services as follows (scale 1-7)
adviser No adviser
Accuracy of statements 6.49 6.49
Timeliness of reporting 6.34 6.32
Turnaround time 6.34 6.37
Range of investment options 6.32 6.31
Internet services (participants) 6.31 6.29
Clarity of statements 6.14 6.10
Retiree services/payments 6.08 6.12
Participant comm. materials 6.01 5.94
Enrollment assistance 5.98 5.95
Participant call center 5.97 5.90
Focus on part asset allocation 5.81 5.79
Overall participant education 5.75 5.70
Fees for participant services 5.60 5.68
Please rate your DC provider’s service to participants (scale 1-7)
adviser No adviser
Responsiveness to problems 6.28 6.21
Industry knowledge of reps 6.23 6.19
Compliance 6.23 6.16
Internet services for sponsor 6.10 6.05
Timeliness/accuracy 6.10 6.10
Staff consistency 6.09 5.96
Reporting 6.09 6.02
Legislation/regulation updates 6.07 5.99
Fee disclosure 5.80 5.80
Fairness of fees 5.79 5.78
Would you recommend your DC provider to a colleague?
adviser No adviser
Yes 90.7% 88.5%
No 2.5% 2.3%
Not sure 6.9% 9.2%
What is the participation rate in your DC plan among eligible employees?
adviser No adviser
Average 74.8 74.2
Median 80.0 80.0
When are employees eligible to participate in the plan?
adviser No adviser
Immediately upon hire 30.3% 33.7%
Within 3 months 25.8% 26.2%
After 4 to 6 months 12.9% 10.3%
After more than 6 months 31.0% 29.8%
Are you currently offering the following investment options in your plan?
adviser No adviser
Employer Stock 8.9% 12.0%
Self-Directed Brokerage 13.6% 15.6%
Real Estate 14.3% 14.3%
Alternative Investments 2.2% 1.4%
Target-Date Lifecycle Funds 35.3% 39.4%
Risk-Based Lifecycle Funds 24.8% 20.6%
Managed Accounts 22.8% 23.7%
ETFs 1.1% 0.6%
None of the above 30.8% 28.1%
How often do you formally review the investment options?
adviser No adviser
Quarterly 31.6% 27.9%
Twice a year 17.6% 16.5%
Annually 37.9% 40.1%
Every 1-2 years 5.5% 5.9%
Every 2-3 years 2.6% 3.1%
Every 3+ years 1.7% 2.0%
Never 1.7% 2.7%
Other (please specify) 1.5% 1.7%
Do you have a written investment policy statement (IPS) for the DC plan?
adviser No adviser
Yes 74.4% 70.5%
No 25.6% 29.5%
If so, how vigilant are you about compliance with the IPS?
Very 50.5% 54.4%
Somewhat 42.8% 36.5%
Not very 5.2% 7.3%
Not concerned 1.5% 1.9%
Does your company have an investment committee for the DC plan?
adviser No adviser
Yes (internal employees only) 54.7% 60.0%
Yes (includes non-employees) 17.3% 11.7%
No 28.0% 28.3%
What types of asset allocation/lifestyle/lifecycle funds are available?
adviser No adviser
Age-based 86.9% 87.3%
Risk-based 31.9% 22.4%
Don’t know/not sure 1.5% 1.7%
Other 0.9% 2.5%
Importance of factors that went into the selection of the lifestyle fund(s)
adviser No adviser
Glide Path 5.8 5.7
Fees 5.9 5.7
Investment performance 6.3 6.2
Risk profile 6.0 6.0
Experience of managers 5.9 5.8
Reputation of fund family 6.0 5.9
Recommendation of DC provider 5.5 5.6
Recommendation of adviser 6.2 5.4
What is the average % of participant balances in lifestyle/lifecycle funds?
adviser No adviser
Average 22.7 18.7
Median 15.0 13.0
How often do you formally review costs/fees?
adviser No adviser
Annually 68.6% 70.3%
Every 1-2 years 12.7% 10.6%
Every 2-3 years 6.6% 6.3%
Every 3-5 years 5.1% 5.5%
Every 5+ years 2.2% 2.6%
Never 4.9% 4.8%
What is the average number of investment options held by your DC plan ­participants?
adviser No adviser
Average 5.4 4.9
Median 5.0 4.0
Implemented automatic deferral ­increases for participants
adviser No adviser
Yes 12.4% 13.6%
No 87.6% 86.4%
If yes, rate per year:
Average 1.2 1.1
Median 1.0 1.0
Do you offer automated rebalancing for participants?
adviser No adviser
Yes 63.9% 60.9%
No 36.1% 39.1%
Do you use automatic enrollment?
adviser No adviser
No 77.5% 74.6%
Yes 22.5% 25.4%
When you implemented auto enrollment, was it applied:
adviser No adviser
To new employees only 64.0% 67.1%
To all employees 36.0% 32.9%
Average % of participant balances in employer stock
adviser No adviser
Average 21.2 22.1
Median 15 18
Do you limit the amount of employer stock an employee can hold?
Adviser No adviser
Yes 26.6% 24.0%
No 73.4% 76.0%