Data & Research June 14, 2012

Advisers Favor Extending the Fiduciary Standard

More advisers should be bound by the Employee Retirement Income Security Act (ERISA) fiduciary standard, a survey found. 
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Advisers were asked their opinions on fiduciary relationships and the definition of the fiduciary standard, as well as their understanding of what the fiduciary standard means now—or would mean in the future—and its impact on their businesses.  

The survey, conducted for the second year, found that advisers believe that extending the fiduciary standard would not limit access to advice or products (65%); cost investors more for advice (82%) or price them out of the market altogether (71%).

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Most advisers believe that extension of the fiduciary standard to brokers would help restore investor confidence. Ninety-seven percent of survey respondents said investors do not understand the difference between brokers and advisers. A majority of respondents (85%) said the gap between what investors and advisers know makes fiduciary advice much more important for ordinary investors.

A majority (70%) agree with the Department of Labor’s proposal to extend the ERISA fiduciary duty to more advisers, and 89% felt that fiduciary duty should cover advice on money being distributed from 401(k)s and IRAs. (See “PSNC 2012: The New Fiduciary.”)

“That support for the fiduciary standard is coming from registered reps and investment advisers across the spectrum of business models demonstrates that the majority of professionals understand that putting the best interests of their clients first is in their long-term best interests, as well, and has become a competitive necessity,” said Blaine Aikin, president of fi360.

Fielded in March and April, the survey by fi360 and AdvisorOne was completed by 380 advisers across a range of adviser business models and affiliations.

Key findings are available here.

Data & Research June 14, 2012

Replacement Rate Studies Could Have Pitfalls

Plan sponsors should not rely on replacement rate studies when differentiating plan providers, a research paper contends.
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Plan sponsors are increasingly requesting replacement rate studies where each provider conducts an analysis to determine the potential impact or improvement of the given investment strategy on participants. In other words, they are using it to determine the “retirement success” of the participants if they use that provider’s or consultant’s product or solution, according to the research paper “Inaccurate Precision: The Danger of Replacement Rate Calculations.”

In many cases, the plan sponsor will supply a potential vendor with average (or median) plan demographics and ask the vendor for the expected replacement ratio at retirement for the average (or median) plan participant, explained David Blanchett, research consultant for Morningstar Investment Management and author of the paper. This approach can be dangerous because it does not take into consideration variables like outside assets and spouses, therefore making it nearly impossible to meaningfully compare the expected replacement ratio provided by two different vendors.

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“You have a very incomplete picture of [plan participants’] retirement readiness,” Blanchett told PLANADVISER.

The paper explores the important differences in how one defines the expected replacement ratio, as well as explains how replacement rate estimates can vary based on different assumptions and provide varying levels of insight. Blanchett used assumptions including savings rate, inflation, market forecasts and retirement age.

 

(Cont...)

According to the research, making relatively minor changes to a set of base assumptions can lead to a range in the median replacement rate for a plan to vary from 48% to 107%, and a range in the replacement rate for an individual to vary from 67% to 261%.

While the intentions of these replacement rate studies may be good, Blanchett said they will not help a plan sponsor make a “quality” decision among providers.

Instead, Blanchett suggested plan sponsors understand the methodology used to build the respective products and then select the approach that best matches the underlying goals and objectives of the plan sponsor. “You really have to understand the methodology instead, and understand how each provider reaches a solution,” he added.

Blanchett said he is concerned that the use of replacement rate studies could filter down market. Replacement rate studies are increasingly used in the large market, but Blanchett thinks small- and mid-sized companies could follow suit. “It’s reinforcing a bad decision, rather than moving people in the right direction,” he said.

 

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