Client Service June 10, 2015

Adviser Opportunity in Educating the Plan Committee

Once a plan committee is established, the adviser is a vital part of keeping members up to date.
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The adviser is a key player in providing ongoing education to retirement plan committee members.

“Education for the committee is one of the major services an adviser provides,” says Steve Bogner, managing director of HighTower at Treasury Partners. “The adviser should be able to come in and address the major areas: risk, the employee experience, the cost of the funds and of the platform,” he tells PLANADVISER. “The committee members need this information to make sure they fulfill their fiduciary responsibility.” 

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As retirement plans increasingly use plan advisers—north of 85% of plan sponsors use one for help with the overall plan, says Jordan Burgess, senior vice president of specialty field sales at Fidelity Advisor Solutions—they benefit from the insights an adviser can share with the committee.

Typically, says Bill McClain, senior defined contribution (DC) consultant with Mercer, plan committee members need updates on judicial, regulatory and legislative issues, in addition to updates on general retirement planning trends. “There’s so much happening in the DC world, it’s difficult for a committee member to keep up with everything going on without support,” he tells PLANADVISER.

From the adviser’s standpoint, McClain says, the regulations that influence DC plans are an important subject to bring before committee members on a regular basis. Regulatory changes in the retirement space are often complex and nuanced, he warns: “You need to be able to understand how a given regulatory change applies to the particular situation, and how it has practical grounding for the client,” he says. “How does it apply to the committee members?” A skilled adviser should be able to answer this question clearly and directly.

Plan committee members’ backgrounds run the gamut, from finance to HR to legal to those from the corporate side, McClain says. “A well-structured committee should be diverse and provide opportunities for sharing different perspectives.”

NEXT: Committees need a free exchange of ideas and opinions.

The diverse backgrounds of committee members will have a big impact on the way a given committee does business, McClain says. “Sometimes you see situations where everybody waits for one person to conduct the committee, and everyone follows that person,” he says. “For fiduciary decisions, you want a free exchange of ideas and consensus.” The ideal committee environment creates an opportunity for people to share and help other committee members learn from their peers.

A finance person, for instance, who is not as up to speed on the Employee Retirement Income Security Act (ERISA) can hear the opinions and insights of someone in HR. McClain notes that when it comes time to select a managed account provider—in many cases, the choice is dependent on the recordkeeper of the plan—the finance person might choose the provider with the lowest cost. The HR person may understand that choosing this provider carries a lot of fiduciary responsibility, because it affects the investment options for participants. The HR person might be more attuned to the sales techniques of the provider than the finance representative.

Cost used to be the top concern, Burgess tells PLANADVISER, but now, the No. 1 issue is preparing participants for retirement. “About 30% of plan sponsors name that as their top concern,” he says. “That leads the best advisers to focus on plan performance, outcomes and participation rates, and they can provide suggestions that improve performance and make sure the plan has a prudent process to select investments.”

“With the recent Supreme Court decision [in Tibble vs. Edison], DC committees need to make platform costs a big focus,” Bogner says. “Committee members will want to make sure that the overall platform costs are in line with the industry.”

NEXT: Focus on the topics that support the goals of the plan.

Employee education should be a very big focus, Bogner says, since it ties into the participant experience and ultimately can affect plan outcomes and retirement readiness. “Is the plan providing enough ways to educate them so they put enough money into the plan and increase on a regular basis?” he asks.

Advisers can use their expertise for plan aspects the committee is considering, McClain says. Perhaps the committee is mulling a brokerage window for the plan. Committee members can benefit from a walk through the typical considerations, pro and con, and a member who is more focused on the regulatory side can bring the committee up to date on the Department of Labor’s (DOL) scrutiny on brokerage windows.

Bogner suggests platform costs and a highly detailed overview of plan costs as two more topics for the committee to tackle. How to align corporate and fiduciary interests is a topic, he says, but not a particularly thorny one. “There’s been a lot of consolidation in plan providers,” he says. “You don’t have to sacrifice service to reduce costs. Many large plan providers are super competitive, and you can get a very good one at a reasonable cost.”

The committee can also examine various areas of risk: what it means to be a plan fiduciary; what risks are involved; the importance of choosing the right platform and the right adviser. Once the committee is built, how to take minutes, establish and review an investment policy statement and an education policy.

Anyone supporting the committee members should understand the issues that matter to them, McClain says, and filter for what is important. “You might think there are things they don’t need to know, but at the same time, most committees are strapped for time,” he points out. “It’s a delicate dance between what’s important but making sure you’re not leaving out information they need.”

Data & Research June 10, 2015

Public Policy, Individual Action

TIAA-CREF’s president and CEO on how to stop the retirement crisis before it starts.
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Can public policy and the private sector come together to build a better retirement for American workers?

As part of the CEO Speaker Series from the Council on Foreign Relations, Roger W. Ferguson Jr., President and CEO of TIAA-CREF, responded to questions about the adequacy of the retirement system today. For one thing, within the next 20 years, the Trustees expect that Social Security will be unable to cover roughly 25% of expected payouts.

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“The good news is most economists would share a consensus about how to fix Social Security,” Ferguson said. The bad news: “Our politicians are having trouble reaching that consensus.”

Understandably, he added, most Americans are concerned they will not have sufficient savings to cover their needs in retirement. “Private savings have been too low for too long,” he said, and though it is a longer-term problem, the solution is easier said than done. “We, as individuals, have to fix what we can.” Workers of all ages need to save more, and those who are able should prepare themselves for a longer career than they might have anticipated.

For physical laborers, that may not be possible. Social Security, Medicare and Medicaid were designed to help keep the aging population above the poverty line. The primary goal of the retirement industry, he argued, should be to shore up those programs, to protect American workers from falling below the line as they age. “This is about long-term, intergenerational risk management.” That answer may be unsatisfactory to some, he said, but we, as an industry, need to focus on fixing what we can.

There are retirement systems in place that Ferguson believes are a good fit for American workers. A strong model is one that uses automatic enrollment to get people into the plan, that couples employee deferrals with an employer match, and that accumulates savings for both a fixed and a variable annuity. The first guarantees income for life, and the second can provide an inflation hedge.

NEXT: Are there enough incentives and policies in place to encourage savings?

The benefit of being able to save tax-deferred is good, Ferguson said. As to whether it is enough, he believes that success comes down to a combination of public policy and private action. Many people are not deferring much income to their savings, even with the incentives already in place.

The current economic climate makes it unlikely that further policies will be put in place to push private savings, he noted. “I suspect, over time, we aren’t going to get more in the way of incentives to save. It’s up to all of us to leverage fully what we have.”

While he argued there is no optimal relationship between the government and private sector, the appropriate balance is cyclical, and depends upon market fluctuations. “Economics tells us that governments do and should rise when there’s a ‘pure public good’ kind of problem,” and this holds true whether the issue is defense or Social Security. One way to think about it, he suggested, is that the government can set the rules for how transactions among external factors should take place.

Though it is controversial, he admitted, “We need, often, a big government back-stop when things really get out of kilter.” The level of government regulation in place may rise with market instability, but should also be expected to fall as conditions return to normal.

Globally, he said, “there are pockets of strength.” Australia’s superannuation system, for example, requires that everyone save a certain amount and that they save in a way that allows them to have annuities.

NEXT: Changing retirement plans.

The nature of retirement planning products themselves should also evolve, Ferguson said. Financial literacy is too low to ask participants to make decisions that are in their own best interests, and many people need advice and guidance when it comes to retirement planning. Auto-enrollment and -escalation can address some of that, but the misconception that many participants have that their target-date fund (TDF) provides guaranteed income in retirement also needs correction. Even participants who are very happy in their 401(k)—and many employees do appreciate the employer-sponsored benefit, he said—regret that there is not more support for decumulation.

“We all have an interest in making sure that compensation systems are structures with the right set of incentives,” he said. “The real secret is that long-term investors and management have an alignment of interests around getting really smart strategies well-executed over a reasonable period of time.” For plan sponsors, having a goal for the plan in place can lead to a better-informed strategy and benefit plan overall. The benchmarks for plan success are unique to each program, but the plan design should provide a roadmap for meeting those targets.

The focus of many plans is on the savings process and accumulating assets, not the payout that should come at retirement. The second question—What will your account balance look like when it comes time to draw it down?—is largely ignored by the products currently available. “Think of retirement as a shared responsibility between employer and employee.”

Ferguson suggested that a successful program would combine the best aspects of defined contribution (DC) and defined benefit (DB) plans. Demand more from savers, then provide a payout at retirement; the challenge is doing that sustainably for participants.

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