Data & Research November 25, 2007

IMHO: Motivationally Speaking

This week, PLANSPONSOR’s November issue will start arriving in the mail (and, with a little bit of luck and time, online).
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It’s a big issue for us—and it remains, far and away, the industry’s largest single survey of plan sponsors. This year, it represents input from more than 5,500 plan sponsors who rely on the services of the nation’s leading providers (and advisers)—across all industries, all market segments, and all regions of the country.
Two years ago, I wrote about the “next level’ in defined contribution designs: a growing interest on the part of plan sponsors in focusing on service elements like participation rates, deferral amounts, and appropriate asset allocation—a precursor, if you will, for the designs that would eventually come to a fuller fruition in the Pension Protection Act. Since then, there have been any number of industry surveys that tout the boom in automatic plan designs—as does ours.
And yet, despite the pickup in automatic enrollment programs—23.1% of those 5,500 employers responding to PLANSPONSOR’s 2007 Defined Contribution Survey now have these programs in place compared with 17.1% a year ago—it has yet to manifest itself noticeably in participation rates. The average participation rate reported was 72.7%, and while that is higher than the 70.1% in the 2006 survey, it remains short of the 74.9% reported in 2005—before such programs were the hot trend(1).
One explanation for the modest uptick in participation rates lies in the fact that less than a quarter of responding employers have embraced automatic enrollment, of course—and that number varies depending on the market segment. Only 13.3% in the micro-segment have adopted automatic enrollment, compared with 35.9% among the largest programs and 34% in the mid-size segment. A second and just as plausible explanation lies in the fact that nearly two-thirds (62.1%) of respondents said that they had adopted automatic enrollment for new employees only, rather than extending it to all eligible employees. Indeed, more than three-quarters of large employers did so on a prospective eligibility basis, compared with 45.8% of micro-plans, though that may be a function of when the feature was adopted. Opt-out rates—7.7% on average, and 3.0% at median—are consistent with the findings in the 2006 survey.
However, what I found most striking in the survey results was that more than half of employers that had adopted the design say they did so because their organization “wanted to be more proactive in helping employees save’—dominating all other factors. Just 13% said they “needed more participation’ to help pass discrimination tests (then again, only about one in five respondents said they had failed a discrimination test in 2006, and that was down considerably from the 2005 results), and half that number said that traditional enrollment/education efforts were not successful. And while it certainly has provided some inspiration, if not motivation, only about one in 10 said that the Pension Protection Act has made the feature “more attractive.’ That finding may, of course, be attributable to several factors: that many of these employers had adopted automatic enrollment prior to the passage of PPA, that some have adopted the feature outside the provisions of the PPA’s auto-enroll safe harbor (the match requirements and retroactive solicitation are problematic for some, particularly for smaller programs), or it may simply be that the safe harbor provisions aren’t effective until next year.
Support for the former two reasons is evidenced by the survey’s finding that only 11.5% have implemented contribution acceleration (though that is twice the 2006 pace)—a feature that automatically increases employee deferrals by a certain percentage each year, and that is incorporated in the requirements for the PPA’s automatic enrollment safe harbor. Significantly, while nearly a quarter of the largest employers have adopted the feature, less than 15% in the mid-market have, as have only about one in 10 in the small market—and half that many in the micro-market. For those that have adopted the feature, a 1% annual increase is the clear “norm.’
Consider also that more than half this year’s respondents said that an automatic enrollment safe harbor would not affect their decision on the provision—and a sizeable number said that such a safe harbor was “not necessary.’ Still, across all market segments, plan sponsors said that only two-thirds of active participants are deferring enough to take full advantage of the maximum employer match.
All in all, then, it appears that it is neither the PPA’s “carrots’ nor the “stick’ of burdensome nondiscrimination tests that will lead plan sponsors to adopt automatic plan designs—just the simple realization that some employees need help to become participants, and that, even then, participants frequently need help to do the right things.
(1)The survey database can include different—and certainly includes more—plan sponsors each year. Consequently, year-over-year comparisons, while instructive, may yield varying results.
In Practice November 21, 2007

New Report Highlights Benefits of Adviser Teams

The best adviser candidates for adviser teams are those constantly looking to improve their practice, the most recent Cerulli report says.
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When forming a team, advisers searching for improvement are going to be those most receptive to change and the most willing to shift their behaviors in order to grow their practice. These advisers realize that to maximize the potential of their practices, they must constantly evolve the way in which they do business, according to “The Cerulli Edge—Advisor Edition: The Differentiation Issue.”

The first key issue for the successful formation of a team of advisers is to ensure that component personalities and expertise are complementary, the report says. Although team members should be like-minded in their goals, the most successful adviser teams combine complementary personalities and business expertise. Therefore, advisers looking to become a part of a team must understand what they are good at and what they like to do, while also understanding those parts of running an advisory practice in which they are not quite as strong.

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Team Structures

In general, Cerulli notes that successful adviser teams have one adviser who specializes in business development and client acquisition, while others then complement him by having expertise in investment management, client service, or another advice discipline. However, the report notes three adviser team structures:

  • one in which a senior adviser dictates responsibilities to junior advisers (this is the most common for small teams with two or three advisers). “A common scenario is one in which the senior adviser sells qualified plans and the junior adviser assists with enrollment meetings and capturing smaller rollovers from the plans,” the report says.
  • a partnership-style structure, in which multiple senior advisers share compensation and responsibilities
  • a team wherein the component advisers act as specialists with expertise in different advice disciplines (this is the least common of the structures, Cerulli says)

Broker-Dealer Involvement

Broker-dealer firms must be careful not to force teams together. Likening it to an “arranged marriage,” Cerulli cautions that such situations will have inherent tension from the start. However, the report says that, since there are clear advantages to adviser teams for both the advisers and the B-D firm (such as the fact that advisers operating on teams report being far more satisfied as a member of a team than they were as sole practitioners), B-Ds should be publicizing these advantages and providing advisers with examples of successful adviser teams.

The report notes that it is important for the B-D to provide structure around the team by clearly articulating the practices of successful teams that a new team should emulate and by helping the prospective team execute the necessary team organization details to help advisers achieve efficiency.

Formalizing Arrangements

The team structure is often most effective when its key components have been put in writing during the formation process. There are three primary areas where new and existing teams formalize their agreements:

  • Compensation: Successful compensation agreements establish rates of pay but also discuss how compensation might shift over time. If, for example, Cerulli notes, a senior adviser brings in a junior adviser, this agreement might detail what milestones (such as revenue, assets under management, and specific training) have been agreed upon after which the junior adviser’s share of practice revenues might increase. This agreement would also go beyond strict compensation to detail how client relationships will be divided if the team were to break up.
  • Division of Responsibilities: The second place where a team should formalize a written agreement is in the division of responsibilities. As the team begins doing business together, it will make the transition much easier if the team members have already agreed on the division of labor.
  • Mission Statement or Value Proposition: Establishing a mission statement or value proposition in writing is valuable and compliments the division of responsibilities so that each member of the team understands what makes the team unique and what their role is in that.

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