The Markets March 1, 2007

Making The Right Choices

Advisers have many criteria to examine when helping clients select the right asset allocation fund.
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Speaking on a panel at the 401(k) SUMMIT in San Diego, Chris Bidwell, an adviser with Smith Barney, told the audience that “we as advisers have to be experts on these funds. The burden is on us to recommend and know the funds,’ he said. Unfortunately, this is more complicated than it is with more traditional funds, panelists speaking at the “Pre-Diversified Portfolios: Evaluating the Options’ said.
Jeff Knight, with Putnam Investments, suggested that plans with knowledgeable investors might find that static lifestyle funds are a good choice because they fit better into a more detailed plan in an overall portfolio. However, for those people who are not going to be creating a broad-based diversified portfolio on their own, and know that they won’t be paying attention to their accounts, target-date funds are the right option, he said.
Asset Allocation Choices
Each fund family offering target date funds has varying policies on how conservative the glide path should be. Putnam’s goal is loss aversion, Knight said, and therefore their funds are very conservative at the retirement date. “Catastrophic loss is totally unacceptable at that stage,’ he said.
However, longevity risk is increased by going into bonds and cash too early at retirement, according to Tom Fontaine with AllianceBernstein. How conservative a participant can afford to be depends on the withdrawal rates because it affects an individual’s ability to handle growth potential, according to Fontaine.
“[You] need to reach a balance between equity and fixed income, because if you put too much equity in, capital markets will eventually snare you’ Bob Boyda with John Hancock Financial Services, said; “it’s really about reaching something that achieves a fixed rate of return.’
Fontaine suggests that advisers can ask different providers how they chose or arrived at their asset allocation strategies to better understand the philosophy behind it and determine whether that philosophy fits with their client’s plan.
Ongoing Monitoring
After selecting a family and adding those funds to the plan menu, like with all other funds, plan sponsors have a responsibility to monitor those funds, something advisers are usually asked to help with. Although target-risk funds can be compared to each other, ongoing evaluation is more challenging with target-date funds, Fontaine said because the allocation changes and since each fund family uses a different glide path, they cannot be compared to each other. He said advisers should look at the fees, underlying components, and asset allocation and then track the performance over time.
Further, since there is no benchmark, advisers have to create their own. Bidwell said he has been creating a custom benchmark with a sophisticated software program, a very tedious and time-consuming process.
Costs and Fees
There is a wide dispersion in fees between providers, Fontaine said, and advisers should look to understand why fees vary so. Some funds are actively managed while others rely on passive investing and the underlying fund investments also contribute to the cost.
“Cost in the absence of value is just an expense,’ Boyda said. Therefore, when examining traditional mutual funds, fees should be a significant factor, but when evaluating the suite of funds that offer a program for saving and allocation, then it is important to look at the costs in light of the value added, he said. “If the fund contributes 200 or 300 basis points [in return] then is it too expensive?’ If you can demonstrate that people who bought into the process did better than those that didn’t, you win, he said.
In Practice February 28, 2007

Creative Prospecting Helps Make the Sale

The three stages of selling a retirement plan into a company, prospecting, proposing and closing all require preparation and creativity, according to Marilyn Pearson, Vice President at Merrill Lynch.
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Prospecting

 

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Prospecting requires preparation, Pearson said, speaking this week at the 401(k) SUMMIT in San Diego, but when done correctly, an efficient prospecting plan will give an adviser many qualified prospects that will bring in business beyond just the 401(k) plan. “People do 401(k) business because they want the other stuff,’ Pearson said, “but it grows trust with the small business owner because it shows them the adviser cares about their business.’
When prospecting in the small market, advisers should be prepared for common stalls and objections, she said, including:
  • “I put all of my money back in my business.’
  • “I am not interested.’
  • “I already have a financial adviser.’
  • “We have a plan and we are happy with it.’
  • “Send me something.’
Pearson suggested that advisers must be creative and persistent to get the plan sponsor to consider becoming engaged in a conversation. Ask the plan sponsor open-ended questions to get them to continue the conversation, she said. Questions such as “what do you currently do for your employees’ retirement savings or your retirement savings?” can get the plan sponsor talking about their plan and might give you some ideas on which you can capitalize.
A prospecting idea favored by Pearson is to send a book that will get some attention, such as Jack Gardner’s “How to Write an Investment Policy Statement” with a note that says “have you reviewed your IPS lately? If not, we can help. We will be calling in three weeks to discuss.” When you put something in their hands that the plan sponsor can use, you have already shown him you care about helping him run his plan better.
Two other books she suggested were “Best Practices for 401(k) Plan Investment Committees,” by Rocco DiBruno, which might be better for a plan you are prospecting that is a little larger, Pearson said. Also, for small business owners who have put all their money back into their business, David Rich’s “Start Late, Finish Rich” can be very helpful and encouraging, she said.
Although Pearson suggested sending books to prospects, she cautioned the audience they should never mail more items than it is possible to follow-up on.

Proposing

 

After you have been invited to a meeting with the plan sponsor, it is your responsibility to educate the plan sponsor about why he should establish a plan and why that should be done with you. “Be the solutions person,” she said.
Many employers focus only on the costs of a plan, and forget about, or aren’t aware of, the benefits to the employer through tax credits and deductions, she said. Every adviser should be able to answer the plan sponsor question “what’s in it for me?”
Further, there are many creative plan designs that can be used, based on company characteristics, Pearson commented, saying the following group of questions can be a good start:
  • How large is your business?
  • What are your current resources?
  • What’s your long-term business plan?
  • What do your employees want?
  • What are your goals as an employer and as an individual?
In discussing and comparing various plan designs with business owners, advisers should touch on five characteristics: contribution limits, benefits and features, complexity, cost of administration, and cash flow requirements, she said.
If even at the proposing level, you are still running into opposition from the sponsor who just isn’t sure about whether or not to offer a plan, Pearson said an adviser can suggest that he help the sponsor do something she calls an “indication of interest.” She says she usually does this through a pizza night, where the sponsor hosts all the employees and the adviser then does a little education and asks them if a plan was offered, would they participate and how much would they save. This can also be a back door way of closing the business, she said, because once the adviser is in the door, educating the participants, its hard for the plan sponsor to bring in anyone else.

Closing

The closing meeting is your opportunity to show your value, Pearson said. She suggested arriving at that meeting with a fiduciary audit binder and a fiduciary audit check list. While there, show a sample enrollment kit and conduct a quick enrollment session, so the committee can actually experience what their employees will go through.
One of the worst things an adviser can do when closing business is over promise, Pearson said. You should provide a Commitment Statement to your clients, giving details of services to the plan. However, she warned the audience not to be overaggressive, saying it is always better to under promise and over deliver. In the closing meeting advisers should ask the committee, “is there anything else we can do to help you make a decision?”
Lastly, after you have shown your value to the plan, and explained what you will do to help them fulfill their obligations, don’t forget to ask for the order. “Ask not, get not,” Pearson said.

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