Practice Management February 9, 2022

DC Plans Are Bolstered by Adding Pension Features

Even with the addition of beneficial plan design features, more work lies ahead for retirement plan advisers to help sponsors include lifetime income options to guarantee income for participants in retirement.
Reported by
PSPA-020922 DB-ization of DC_Miriam Martincic-web

Art by Miriam Martincic

Plan sponsors have added to defined contribution plans several of the features that used to characterize defined benefit pensions—measuring and adjusting prime retirement plan design recipes—to maximize participants’ retirement readiness, according to sources.

To help participants grow their balances, employer-sponsored DC plans are also incorporating behavioral finance concepts into plan design and architecture by automating systems.

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“Now we see automatic enrollment, we see target dates, we see managed accounts that are becoming more complex and having more options as baked into defined contribution plans,” says Deb Dupont, assistant vice president for retirement plans research at the LIMRA Secure Retirement Institute. “All of these things make it much easier and in fact [a] more passive decision on the part of the participant.”

Legislation, including 2019’s Setting Up Every Community for Retirement Act, has also eased plan sponsors’ responsibilities when selecting an insurer to offer annuitization options for participants’ decumulation stage. The safe harbor has prompted sponsors to increasingly build lifetime income options into their plans to provide retirement income certainty. And prior to the SECURE Act, the Pension Protection Act of 2006 led to widespread adoption of qualified default investment alternatives, including target-date funds, which helped DC plans incorporate ideas from DB plans, Dupont adds.   

“You can be automatically enrolled and invest in a target-date fund and not [have to] make a participation decision. You’re not making an investment decision, you’re probably not deciding to increase your contributions, because now that is part of it,” and it’s done automatically, Dupont explains.

The SECURE Act also empowered the Department of Labor to mandate that defined contribution plan participants receive lifetime income illustrations on their retirement plan statements, which show what their monthly income amounts would be if their balances were annuitized.

Catherine Collinson, CEO and president at the Transamerica Institute and president of the Transamerica Center for Retirement Studies, says DC industry innovations, including auto-features, have brought greater professional investment guidance to bolster DC participants’ retirement readiness and added more personalization.   

“The defined contribution industry has continually innovated in terms of plan design, as well as investment offerings, guidance, advice and other service offerings,” she says. “We’ve seen the various forms of professional guidance and advice that are available, especially for retirement savers who are not comfortable managing their own retirement savings and investments. We’ve seen in plan annuities—and looking at different forms of retirement income and the broad selection available to both sponsors and participants—that really helps tailor solutions to an individual’s needs and circumstances.”

While behavioral finance, legislation and the greater focus on assisting participants with decumulation options have helped DC plans grow retirement plan coverage and bolster participants’ retirement readiness, perhaps the most important change in the industry has been the change to plan sponsors’ philosophies, says Jen DeLong, managing director and head of defined contribution at AllianceBernstein.

“From a bigger picture, it’s really this mindset shift that we see [among] many of the plan sponsors we work with, really beginning to think about their DC plans not just as savings plans, but really as retirement income plans,” she says. “Certainly, since the SECURE Act, we see a lot more interest from plan sponsors, consultants and retirement plan advisers in really understanding the types of solutions available and thinking about what they really want the goals of their plan to be.”

Plan sponsors have increased their focus on not only the importance of participants saving in DC plans for accumulation but also on of decumulation as well, she says.  

Superior Plan?

Despite the increasing DB-ification of the DC plan industry, neither type of plan is superior, Collinson says.

“The best plan for retirement savers is the plan that they have access to and are able to use to save, plan and prepare,” she explains. “I don’t think it’s fair to compare defined contribution and defined benefit plans.”

Direct comparisons are inappropriate because “people today are more likely to change employers than they were 40 or 50 years ago,” she says. “Defined benefit plans were developed when workforce trends were different and the world was a lot different. They served their purpose extremely well and helped people prepare for retirement.”

Recent research from the National Institute on Retirement Security showed that DB plans have retained a cost advantage over DC plans. However, employers have been challenged to meet pension return expectations, and plan sponsors bear all the investment risks with a DB plan, explains Eric Stevenson, president, Nationwide Retirement Plans. 

“The challenge with DB plans isn’t the structure so much as who is bearing the investment risk, and 100% of the investment risk in the pension plan is borne by the plan sponsor,” he says. “When we’ve seen these plans get sideways or upside down, it’s because a plan sponsor and their team made the decision that they thought they could get some return, and if they aren’t able to do that, they are still on the hook for that number.”

More Work Ahead

The efforts to spice up DC plans with DB features are working to improve participants’ retirement readiness, but more work remains to be done , particularly for participants at the decumulation stage who need retirement income options, sources said.

“One of the things that make [DB plans] so powerful is that it’s mandatory, so there’s no participant engagement in that and there’s no selection of the investments by the participant,” Stevenson says. “The other part is, it’s very much focused on the outcome, and that’s the part that’s probably most attractive, [because] it’s guaranteed that you work so many years and, based on that formula, then you’re going to have so much in retirement.”

DeLong also says the biggest feature missing in DC plans that’s present in pensions is the certainty of income, because DC plans were originally aimed as supplementary to pensions and Social Security, so they don’t always have a guarantee built in.

“As an industry, we helped [participants] hear the message about needing to save as much money as they possibly can by the time they get to retirement age, but where we collectively are all continuing to work is helping participants now think about that nest egg and think about how that can be translated into monthly or annual income throughout retirement,” she says.

Practice Management February 4, 2022

Adviser Industry Fee Pressures in Focus

As competition heats up and clients expect more for their fees, forward-thinking advisers are focused on both protecting existing revenue sources and adding new revenue streams.
Reported by
PA-012822 Adviser Fees in 2022_ Lorenzo Gritti-web

Art by Lorenzo Gritti

Fee compression has impacted adviser revenue models for several years now, thanks to such forces as increasing automation, stiffer competition and ongoing industry consolidation. Experts say these trends are set to continue throughout 2022, leaving forward-thinking advisers focused on protecting existing revenue and adding new revenue streams.

“Just like the recordkeepers, advisers have seen a trend over the years, as our fees are constantly being benchmarked to other firms that do the same work,” says Ryan Gardner, managing partner and head of defined contribution (DC) at Fiducient Advisors in Windsor, Connecticut. “Over time, it becomes harder to charge more for certain services due to the competitive pressures in the marketplace.”

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One reason there has been so much pressure on fees, says David Swallow, managing director of consultant relations and retention at TIAA in Tampa, Florida, is the commoditization of some of the work that advisers have traditionally done. Examples of this include portfolio construction and investment monitoring, among others.

“Those services have become pretty much the standard offer that you can get from anybody that’s an investment adviser,” Swallow says.

The fee compression is leading some advisers to look for ways to differentiate themselves, via the types of services they offer, while also growing revenue. For some plan advisers, that growth is organic, but others are looking to mergers and acquisitions (M&As) to scale up quickly in order to remain competitive and justify their rates.

Swallow says the M&A boom in the retirement industry will likely continue in 2022, so its impact on fees will continue as well.

“You’re seeing more of the smaller, boutique-type firms looking to potentially join with larger firms that have other lines of business or other areas that they can leverage, so that they can grow their revenue with the client base that they have,” Swallow says.

Such consolidation is, in turn, driving greater efficiencies and lowering overhead costs, putting even further pressure on fees, Swallow says.

Broadening Services for Added Value

Greg Fiore, senior vice president at OneDigital in Atlanta, says many advisers are broadening the scope of their work to both add value to the client and to potentially bring in more revenue. Those advisers are leaning into their role as a consultant, taking on many plan management tasks, such as making sure that the plan meets filing deadline, helping with plan design strategy and conducting educational meetings with participants.

“Once you build that trust at the client level and provide that kind of service, [clients] are asking you to come back and do other things, like look at student loans, or health savings accounts [HSAs], or emergency savings,” Fiore says. “And that work can be more contract-based, paying project fees.”

Swallow says advisers have plenty of opportunities  to expand the products and services they offer clients.

“One of the areas that we have seen a focus on from legacy institutional consultants has been offering some type of participant advice service,” Swallow says. “Those firms see offering wealth management to participants as a way to generate additional fees.”

In addition, advisers can generate fees by providing guidance to clients on new regulations and how potential changes might impact their plans. That includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which has many provisions plan sponsors are still considering, and may also include SECURE 2.0, aka the Securing a Strong Retirement Act, which some expect to make its way through Congress this year.

Advisers are also charging project fees for specific, one-off services they provide, such as helping a client through the request for proposals (RFP) process, reviewing their plan documents or providing support as they combine plans after a merger.

Those charges are on top of the retainer fees that most advisers still charge, as either a percentage of assets under management (AUM) or a flat fee based on plan size. The 2020 PLANADVISER Practice Benchmarking Survey found that two-thirds of clients still pay their adviser on an asset-based fee schedule.

Away From Commissions

In general, Fiore says, plan advisers are moving away from commission-based structures, as more plan sponsors express a desire to hire fiduciaries.

“It’s very rare to see broker/dealers [B/Ds] involved in 401(k) plans anymore,” Fiore says. “In fact, most reps are freezing their broker/dealer licenses.”

Ellen Lander, principal at Renaissance Benefit Advisors Group in New York City, says her firm sticks to a flat-rate fee schedule, which makes sense for all but the smallest plan sponsors (which are not in her client base).

“Adviser work is exponentially greater than it used to be,” she explains. “The amount of work we do is crazy. That means that the amount of hours that we need to spend just doesn’t relate to a percentage of assets.”

The glut of recent fee-related lawsuits against plans has also prompted additional discussions between plan sponsors and their advisers on the role that fees pay in their plans.

There have been nearly 150 Employee Retirement Income Security Act (ERISA) excessive fee lawsuits over the past two years, according to Goodwin Procter law firm, and the suits have already begun piling up in 2022. PPL Corp. and Mass Brigham General are among the companies that have already received such a suit in the new year.

“That litigation has recentered the discussion on fees and created quite a bit more urgency for plan sponsors to look at their fees,” Gardner says. “They need to make sure that both the level of the fee is reasonable, and how it is being applied is equitable. Participants are much more aware of the fees that they’re paying than they were five or six years ago.”

Benchmarking Plan Fees

In addition to making sure their own fees are in line with industry norms, advisers can also use these fee conversations to provide additional services to plan sponsors.

“It the adviser is good, he’s going to do a market search every three years for the client,” Fiore says. “Even if the client is happy with its recordkeeper, we want to make sure that the fees it’s paying are reasonable.”

It’s also important for advisers to monitor such lawsuits to understand the tactics attorneys are using to file suit against plan sponsors, and to explain these trends to committees. Those lawsuits essentially offer a road map that committees can follow to protect themselves from similar cases, Gardner says.

Lander says continually evaluating fees also makes sense as a plan evolves in terms of both demographics and asset size. She reminds clients concerned about lawsuits that reasonable “does not mean cheap,” but rather should reflect the level of service and expertise the plan sponsor is receiving. Beyond that, she emphasizes the importance of transparency on which (if any) fees participants are paying.

“If the fees are either a flat-dollar fee or a flat percentage for every participant, you need to be upfront about what those fees are and why they’re being paid,” Lander adds.

More Communication

Being upfront may require specific communication from the plan sponsors on fees, separate from the recordkeeper’s fee disclosures, with a detailed description about what that fee covers.

“Transparency equals trust,” Lander says. “Participants will probably trust you more if they understand why fees are being paid, and what they are paying for.”

Lander helps her clients conduct annual fee analyses to ensure fees are reasonable. In addition to looking at adviser and recordkeeping fees, those analyses also take a close look at the investment menu itself, making sure there aren’t any new lower-class share classes, for example, that a plan might be able to access to lower the fees for participants.

Documenting discussions on all of these topics can prevent future fee-related lawsuits—or serve as a defense against fee lawsuits, Lander says.

“You want to document what you looked at and why you made the decision that you did on fees,” Lander says. “We believe that keep the litigators away. They can’t say ‘Why didn’t you do this?’ because we can show them the documentation and the rational reason why we didn’t do what they’re suggesting.”

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