TIAA Research: Retirement Plan Advisers Target Efficiency

Advisers are looking for maximum efficiency while broadening their range of products and services.

Retirement plan advisers have a tricky dance to do in the coming years, as they seek to maximize efficiency in their practices while also offering a broader range of products and services to plan sponsors, according to adviser conversations organized by TIAA.

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When more than 60 retirement plan advisers were asked about their priorities in the next three years, they pointed to, in order of importance: growing and retaining business; improving product and service offerings; and increasing efficiencies, according to research conducted by TIAA and Chatham Partners in October and November 2022.

That combination of priorities has advisers looking both to keep costs down and find new channels for revenue, according to David Swallow, head of consultant relations at TIAA.

“As you look across the marketplace, adviser services are becoming more and more competitive,” Swallow says. “They are bringing additional products and services to the marketplace; they are looking for other ways to scale revenue. … How I’d classify it is that they are broadening their relationship with their clients to really bring a full breadth of services.”

Swallow points to the trend of retirement adviser aggregation in recent years by which boutique advisories have been bought up by larger aggregators who offer more services to clients.

“The reality is that if you can’t scale and you can’t become more efficient, then the question is: ‘Do I join a bigger force that has all the infrastructure in place and can provide all those services to me and I can still do what I love?’” he says.

Swallow believes it is becoming harder for some boutique shops to compete against larger aggregators “because of the scale and what they’re able to do from a pricing standpoint, as well as the breadth and depth of services that does differentiate them.”

Participant Engagement

When advisers were asked what they think plan sponsors need most from their retirement plan provider, they pointed to participant services and education as the lead area of need. That came ahead of plan administration support and strong client service, and Swallow sees it as another sign of the times.

“What we’re hearing is that there really is a desire by plan sponsors to get their populations engaged,” Swallow says. “Consultants and advisers are hearing this from their clients and, in many cases, they are now providing these services.”

He notes that typical institutional advisers had not previously engaged as much with participants, often leaving that to the recordkeeper or another third-party provider.

Now, Swallow says, some retirement consultancies are offering the service and others are not, which is a good thing for the market, so long as specific plan sponsor needs are being met.

Fiduciary Focus

When asked to guess what their clients’ key priorities are over the next three years, retirement consultants led with compliance and governance, followed by retaining and offering competitive benefits, and then pointed to participant engagement.

Swallow does not necessarily think clients would rank compliance and governance at the top themselves. But he does believe advisers see their fiduciary role as a key part of their value offering, both for investment decisions with the plan and in broader areas such as preparing for SECURE 2.0 regulations and opportunities.

One area in particular that advisers spoke about was preparing clients for the Roth catch-up contributions for higher-paid employees that will go into effect in 2024. This is especially true in the nonprofit space, where TIAA focuses a large part of its business, according to Swallow.

“A significant amount of our clients do not have Roth today,” he says. There is an opportunity for advisers in “really making sure that clients are prepared for January of next year, when you need to have a Roth source in your plan in order to allow for catch-up contributions.”

When asked about key trends overall in the retirement advisement space, the advisers said financial wellness, retirement income and fee compression were the biggest areas to watch. Swallow says TIAA was glad to see retirement income come in at number two. He notes the firm has long had a focus on retirement income options, such as annuities ,in 403(b) retirement plans and more recently has been focused on adding them to 401(k) plans.

Overall, the head of consultant relations recommends that advisers try to anticipate key trends in the industry and needs created by pending legislation to cultivate business.

“It’s going to show [clients] your value, as well as the importance of getting out in front of some of these things,” he says.

 

How Emergency Savings Serves Low-Income Households

BlackRock research shows that emergency savings balances helped low-income households keep more money in their retirement savings accounts during the COVID-19 pandemic.

Low-income households with at least $1,000 in emergency savings were half as likely to withdraw money from their workplace retirement savings accounts during the pandemic, according to a study from BlackRock’s Emergency Savings Initiative, conducted in partnership with the Defined Contribution Institutional Investment Association’s Retirement Research Center.

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The study underscored the importance of emergency funds as an important buffer to keep workers from depleting their retirement savings. What’s more, participants with insufficient emergency savings were 13 times more likely to take a hardship withdrawal than those with adequate savings, according to research from ESI partner Voya Financial.

In addition to their importance as a buffer, offering emergency savings paired with a retirement account encouraged retirement contributions. The findings from the ESI and DCIIA’s RRC indicated that those with emergency savings were 70% more likely to contribute to their defined contribution plan.

In conducting the study, the ESI observed strategies that increased participants’ adoption of emergency savings, including auto-enrollment for short-term savings programs. Programs that were active choice opt-out had a median uptake rate (43%) more than four times higher than those in which people had to pro-actively take action to start saving (10%).

In-product prompts to contribute to emergency savings, such as onboarding screens or savings questionnaires, also encouraged emergency savings. Adoption of these methods resulted in increased median uptake rates (39%) compared with interventions that relied only on email campaigns to nudge savings behavior (7%).

Additionally, interventions that targeted new employees had greater median uptake rates, at 39%, compared with projects that targeted existing employees or members, at 8%. The BlackRock report suggested this is likely because new users are less habituated and are at a prime moment for starting a new behavior.

The report also recommended that to expand emergency savings access, employees should be offered in-plan, after-tax options, as well as out-of-plan options. Yet more than half of the bottom quarter of earners, 58%, do not have access to retirement plans. Therefore, many employees, particularly those earning low incomes, need emergency savings options that are separated from a retirement plan in the manner of a separate account or a sidecar to their savings plan.

SECURE 2.0 retirement law contains two main provisions related to emergency savings, both of which are optional for plan sponsors starting in 2024. The first would permit the creation of a “sidecar” account tied to a participant’s retirement account. The second provision would permit participants to withdraw up to $1,000 in a year from their retirement account to pay for an emergency.  

The ESI also suggested policy changes to increase out-of-plan emergency savings options, given that among working Americans in the bottom quartile of earners, a majority do not have access to an in-plan retirement option.

“Public policy should further catalyze the innovation for out-of-plan solutions already happening in the private sector,” the report wrote. “This includes ensuring that savings options utilized by people earning low income—such as savings features on payroll cards or stand-alone savings accounts—benefit from future policy changes, like allowing for similar automatic enrollment into out-of-plan accounts.”

BlackRock’s Social Impact team launched ESI in 2019. The information in the report was drawn from projects conducted with multiple partners.

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