Practice Management August 17, 2021

We Nailed That RFP Response! (Didn’t We?)

Wouldn’t you love to be a fly on the wall at the plan sponsor defined contribution committee meeting where members discuss request for proposals responses?
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Wouldn’t you love to be a fly on the wall at the plan sponsor defined contribution (DC) committee meeting where members discuss request for proposals (RFP) responses and decide who gets invited for final presentations? Or, likewise, for the same committee, as its members deliberate once final presentations are complete? Here’s the inside track to what happens during those conversations.

One of the most common misses by advisers is using one answer in a variety of possible RFP questions: “We’ll customize a solution to fit your needs.” While it appears to send a message of broad capabilities, great service and flexibility, it is entirely too vague. The committee reads this response and sees nothing more than a lump of clay. Its members understand nothing more about you than they did before reading the RFP response.

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In our experience, to better communicate your unique capabilities, you need to do two things. First, provide a case study example and, second, provide a proposed starting point for your solution. A case study with results and hard numbers makes your potential solution more of a reality.

Here is an example: “For a client similar to yours, 65% of participants that attended our education session increased deferral rates by at least 1%.” Then follow your case study with a potential starting point for your solution. Example: “We would propose beginning with a survey to evaluate how many employees are using the current wellness program. After this survey, etc.” Bring your solution to life!

The committee will notice the degree to which you customize your RFP response. Your submission needs to be a personalized response, not just a simple copy and paste from your RFP answer bank. A custom cover letter is not enough. The degree to which the plan sponsor feels you are responding specifically to its RFP does make a difference. The team will notice it and will also discuss it.

The organization and readability of your response is also critical. As you write the RFP response, you may take it for granted that you know how to locate all your references, tabs, exhibits, illustrations and appendices. The same may not be true for the person who will read it for the first time, and that person may also misunderstand ambiguous or unclear responses. While it may be time-consuming, a peer review is well worth the additional time and effort, if only to double check organization and readability.

And the peer review will serve a second purpose. Almost every plan sponsor will have one or two committee members who notice every typographical error. A typographical error is viewed in most cases as a lack of attention to detail, which could then be extended to imply a potential lack of attention to detail in Employee Retirement Income Security Act (ERISA) fiduciary duties.

People also notice professional printing and graphics. If your RFP submission or final package looks like it was prepared using only basic word processing skills and possibly an inkjet printer, then the plan sponsor will take notice. Whether a hard copy or electronic submission, make sure it looks professional. If your firm is not large enough to have its own in-house marketing and graphics support, you might need to come up with a way to make sure you don’t look “too small” because of your print graphics and marketing material.

Finally, most RFPs will include a question that you should welcome: “What differentiates your firm from your competition?”

But so many advisers drop the ball here. It is critical that your answer actually “differentiates” and makes you look unique. If your answer to this question is something anyone else could use, then you need to change it. Example of a poor response: “What makes us different is our people and our commitment to service.” Anyone could give this answer. If you use this response, you are no different than anyone else. If you want a plan sponsor to notice you as “different,” then the answer to this question needs to be uniquely yours.

 

Editors note:

Eric Dyson is the executive director of RFP 401k Advisor and acts as an independent search consultant for plan sponsors.

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 Inc. (ISS) or its affiliates.

The Markets July 27, 2021

The Art of Comparing TDF and Balanced Fund Performance

The outputs of a hypothetical model based on historical net asset values for balanced funds and target-date funds show just how complicated it can be to compare the relative merits of the two approaches to asset allocation. As it turns out, balanced funds, though less popular, might deserve another look.
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In 2007—around the time the Department of Labor (DOL) was finalizing its guidelines regarding permissible qualified default investment alternatives (QDIAs)—target-date funds (TDFs) were the default investment for 33% of plans responding to the annual PLANSPONSOR Defined Contribution (DC) Survey, while 20% of plans used stable value funds, 16% used a balanced fund and 6% used managed accounts.

More than a decade later, balanced funds and managed accounts, both of which offer the same safe harbor fiduciary protections as target-date funds—have become afterthoughts in the QDIA selection process and are now only used by 5% and 4% of plans, respectively. TDFs are now being used by 76% of plans.

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Given its dominant popularity as the default investment, it is natural to ask how TDF performance has compared with the alternatives—particularly balanced funds.

To answer this question, PLANADVISER’s Research and Survey team created a model that follows the “career” of an employee who started investing in one of a number of commonly used balanced funds and 2030 target-date funds around 2008. The model uses reported daily net asset value (NAV) prices to determine how many shares the employee would purchase each pay period and assumes that all dividends and capital gains were reinvested when paid. The model, in addition to comparing outcomes across the different balanced funds and TDFs, can also account for different deferral rates and employer match structures.

The goal of this exercise was to understand what the participant’s actual account balance would have been with each investment after 12 years of continuous, uninterrupted contributions. Although past performance is not indicative of future results, tracking actual outcomes based on actual data shows what might be considered actual results for participants from 2008 to 2021. As it turns out, balanced funds might deserve a closer look.

The Basic Findings

While the research team is still refining the model, the preliminary findings may surprise some. Overall, participants invested in balanced funds were very competitive with identical participants in 2030 target-date funds. In many cases, balanced funds outperformed the 2030 TDFs, with the average final account balance for the balanced funds in the first tests outperforming the average 2030 target-date fund by almost 6%. What was equally surprising was the range of overall outcomes among all funds tested, with the best performing fund returning a final account balance that was 26% higher than the lowest performing fund.

As the research team emphasizes, much work still needs to be done to improve the model and understand the factors influencing these results. The team looks forward to sharing additional findings from this project later in the year, but what seems clear from its early work is that balanced funds might deserve a more prominent place in the evaluation and selection of a plan’s QDIA.

A Few Notes of Caution

The snap reaction to this data could be that balanced funds are “better,” because they increased the ending savings amount by 6% in this theoretical example. In reality, however, there is some important context to consider before drawing any conclusions from this basic analysis.

The first point relates to market returns and whether one considers “baseline” market growth—that is, the rate of growth that would have been expected during this time frame based on historical return assumptions—or the “accelerated” market growth that has actually taken place since the mid-1990s. This is to say, it should be obvious that a fund that has higher equity allocations would have performed better during a period of accelerated growth. So, while one TDF with a higher-than-average equity allocation considered by the model may do better in this analysis, which considers the time frame of 2008 to 2021, a substantially different outcome might have been reached had the market returns differed.

Should retirement plan investors and their sponsors believe the outsized growth will continue? And, furthermore, it is necessary to ask what the return picture looked like during the theoretical savings journey mapped by the model. If one were to tabulate the outcomes after five or 10 years, the results are different.

Where the Rubber Hits the Road

Participant surveys conducted by the PLANADVISER/PLANSPONSOR research team have consistently shown that investors are willing to trade lower fees/returns for less market risk. This fact adds yet another layer of complexity in comparing potential options for a plan’s QDIA.

In the end, one cannot merely point to the data above and take this as proof that the typical retirement plan investor needs to use a TDF or a balanced fund. Furthermore, a given starting salary entered into the model (say, $40,000) that is assumed to grow every year might not be reflective of today’s middle-income or lower-income families.

In sum, investment models like this one are most helpful for demonstrating the multidimensional analysis that must go into the prudent choice of a QDIA, and their ability to provide definitive answers to highly nuanced questions may be limited.

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