Practice Management May 8, 2020

Be Stronger in the Recovery

Todd Kading, president and co-founder of LeafHouse Financial, discusses the importance of flexibility and innovation when the tough times arrive.
Reported by

As we all spend more time working remotely, and putting our business continuity/disaster recovery protocols in place in response to the COVID-19 pandemic, it’s a time to take stock of those things that can help make doing our day-to-day business more viable in preparation for tough times.

I fear the sun has been shining on the equity investment world for so long that some companies haven’t done enough to prepare for the rainy days. As firms look to weather the current storm, and future ones, I would suggest looking at how you stand in four business areas: technology, flexibility, scalability and innovation.  

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Technology

Firms need their employees to be able to work remotely, with no need to perform functions in an office environment. This usually requires an investment in technology, which will allow companies to swiftly divert to a remote work system for the safety and security of employees and vendors.

At LeafHouse, while we’d prefer to be able to gather in our collaborative space, we know that remote working is the safest bet right now, and we can look to our previous technology investment as a reason we can do this. Additionally, we have invested millions of dollars over 10 years, optimizing the data integration needed to accomplish appropriate 3(38) oversight of 57 platforms with 40 recordkeepers and thousands of plans. This has provided us and our clients with flexible solutions on different platforms—and reassured our clients that we’ll continue to deliver on our contracts and promises no matter the environment.

Flexibility

For all advisers, a key component of their corporate philosophy must be flexibility and agility, especially during times of crisis. None of us is stuck in a one-size-fits-all methodology.

The more complex your network, the more sophisticated your offerings, the more you need to work flexibility into your methods. Technology, as we stated above, helps enable this. Equally important: To integrate with 30 or 40 varied recordkeepers, you need to make sure to hire and train very good people.

Scalability

During difficult times like this, employers and their employees are seeking increased service and lower costs. Working with a large 3(38) investment manager avails you of scale to receive these benefits, and provides advisers, employers and their employees with accurate and thorough reporting as well as the documentation and transparency to ensure proper oversight.

In our case, the billions of dollars we manage enables us to negotiate lower investment prices for our participants. These prices are very difficult for advisers or employers to negotiate on their own. This type of scalability delivers the sought-after increased service at a lower cost.

This also allows advisers to focus on their relationships with the employer and their employees. Advisers can spend their time on true plan oversight and on calming the fears of their clients in the current environment. This is where advisers excel and show their true value.

Innovation

By creating innovative tools and programs, we in the adviser community make our businesses more viable, long term. One benefit of such programs is they provide differentiation.

Advisers who partner with us, for example, have the benefit of our deep expertise in the environmental, social and governance (ESG) investment space. By providing them, and their clients, with what we believe is an ESG integration system compliant with Department of Labor (DOL) guidance, we show that the adviser cares about the unique needs of each plan, including those interested in investing in such a manner. No matter what part of the retirement plan spectrum you’re on, it’s imperative to ensure your business stays ahead of what clients are asking for.

Another example of creating innovation that leads to a diversified business is the formation of a participant-specific managed account experience. A diversified business, one including a dimension that’s truly client-centric, helps to bolster an organization during trying times.

As we live through this period of working from home, I encourage you to find some time to relax. Read more. Enjoy your family. Many of us travel a lot for work and rarely get time to eat three meals a day with partners and kids. This is the time for that. I also encourage you to think about the things you could do to bolster your business when there is a return to normalcy. The things you put in place today will lay the groundwork for stability during the next crisis and growth for the long term. Stay safe. Stay strong. Stay positive.

 

Author’s note:

Todd Kading is president and co-founder of LeafHouse Financial, a national discretionary investment manager and consultant for retirement plans. The firm manages more than $9.5 billion in retirement plan assets and acts in both a 3(21) and 3(38) fiduciary capacity for a multitude of private and public retirement plans, ranging from startups to large institutions across the U.S. 

Kading partners with advisers, recordkeeper and third-party administrator (TPA) institutions in providing fiduciary investment services to clients.

The opinions expressed are those of LeafHouse Financial’s investment team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.

LeafHouse Financial (“LeafHouse”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about LeafHouse’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. LH-20-34

Editor’s note:

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

The Markets May 6, 2020

QDIAs Have Evolved. They Will Again After the Coronavirus.

Many participants appear to be battled hardened from the Great Recession and are enjoying at least some measure of protection from well-diversified default portfolios.
Reported by


Most participants invested in a qualified default investment alternative (QDIA) stayed the course in the first quarter, despite the tremendous decline in the market associated with the coronavirus pandemic, says David Blanchett, head of retirement research at Morningstar Investment Management.

Blanchett made this point during a recent webinar hosted by four industry organizations—the Defined Contribution Institutional Investment Association (DCIIA), the Retirement Advisor University, the SPARK Institute and the Plan Sponsor University.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Only 2% of those invested in a managed account made a trade and only 2.1% of those invested in a target-date fund (TDF) made a trade, Blanchett explains. By comparison, 17% of those who self-direct their investments made a change, he says, and 22.7% of those invested in more than one TDF vintage made a change.

“You don’t want them trading because this hurts them in terms of long-term performance,” Blanchett says, noting the tendency of nonprofessional investors to chase performance and “buy high, sell low.

Sharon Scanlon, a senior vice president who heads up retirement plan services at Lincoln Financial Group, agrees that investors in her company’s products mostly stayed the course in the first quarter.

Liana Magner, partner in the U.S. defined contribution practice of Mercer, adds that since the Great Recession of 2008, near-retirement TDF vintages have scaled back their equity exposure. In 2008, they suffered a 14% decline, whereas in the first quarter of 2020, they went down by 10.4%.

“This is mostly because they have less exposure to growth,” Magner explains. “Long-term bonds have helped as well. The key question is how will this COVID-19 crisis impact the TDF marketplace? Will they take on more downside protection? Will there be more focus on retirement income? Will there be more use of custom funds? It will take some time for the investment managers to become more strategic, but we do expect a reinvention phase.”

Joe DeNoyior, president Washington Financial Group, a division of HUB International, says one of the most important perennial challenges plan sponsors face is determining the appropriate QDIA for their workforce.

“The 2008 crisis exposed that not all TDFs are created equal,” he adds. “Some can mitigate volatility. Some are tactical. In this sense, TDFs have become more sophisticated, and we think sponsors should expand their due diligence as a result. Plan sponsors need to scrutinize their default options by taking a view through their employees’ eyes, as well as taking a look at their demographics.”

DeNoyior notes that more of Washington Financial Group’s clients have been considering managed accounts in recent years. DeNoyior expects more sponsors will adopt them, particularly as the expanded use of automatic enrollment and automatic escalation has resulted in higher balances.

“They can provide for difference risk tolerance and tend to have better stickiness of assets,” he says. “Once the dust settles from this crisis, we think plan sponsors will be more inclined to use managed accounts as the QDIA, or at least offer it in their plan.”

Doug McIntosh, vice president of investments at Prudential Retirement, says that plan participants generally have performed better during this crisis than in the Great Recession of 2008—largely because of the increased use of TDFs as the QDIA. In 2008, 60% of plans used TDFs as the QDIA. Today, that is 97%. In addition, “today, TDFs have generally taken down risk for those closest to retirement,” McIntosh says.

“The glidepaths have gotten more conservative,” he says. “As well, there are a broader set of asset classes being utilized, such as TIPS [Treasury Inflation Protected Securities] and private real estate, to minimize equity volatility and inflation.”

However, he believes TDFs need to become even more conservative, noting that some 2025 TDFs lost 20% to 25% of their value in the first quarter of 2020. “If I am only five years out from retirement, that is a concern,” he says.

In addition, the SECURE Act encourages plans to offer income solutions. McIntosh believes that should be part of the QDIA. He also expects TDFs and managed accounts to pair actively managed fixed income with low-cost passive asset management on the equity side.

As to how investors who manage their own portfolios fare compared to those in the QDIA, McIntosh says, the self-directed investors, especially those in brokerage accounts, underperform.

«