Chepeni(k)’s Thoughts: Savings, Not Investment Selection, Is the Key to Successful Retirement Plan Outcomes

3(38) advisers are not the answer to America's retirement savings crisis.

While it sounds like a nice idea, advisers who can select retirement plan investments at their discretion cannot single-handedly solve the problem.  In my opinion, this crisis has nothing to do with investment selection. It can only be addressed by 1) workers saving more money, 2) more effective participant communication, and 3) perhaps by plan design. 

By definition, 3(38) advisers are fiduciaries because they assume discretion, authority and control of the plan’s assets. Under the Employee Retirement Income Security Act (ERISA), a plan sponsor can delegate the significant responsibility (and liability) of selecting, monitoring and replacing investments to a 3(38) investment manager fiduciary. 

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However, I see too many retirement plan advisers and vendors leading with the term 3(38) in every client and prospect meeting. In essence, they’re selling the idea that the sponsor can just sit back, relax, and let the adviser or vendor take over the investment management process, and thus, the primary fiduciary role.

That said, having a 3(38) adviser on board does not mean the plan sponsor can just “set it and forget it,” and assume that the adviser will take on all of the fiduciary liability. If anything, that way of thinking puts plan sponsors at even greater risk. It’s just not that easy to skirt fiduciary responsibility.

I also hear about too many instances where clients believe a 3(38) adviser can absolve them from risk. This isn’t possible. After all, someone hired someone, and somewhere along that chain, someone has to be responsible for those decisions. Sure, the client can minimize risk, but escape it altogether? That’s not going to happen.

Consider the lawsuits currently happening in our industry. Granted, those weren't caused by 3(38) scenarios, where one investment was chosen over another with proper due diligence. That's the very purpose of a 3(38) adviser. Nearly all of these lawsuits are related to inherent conflicts of interest, excessive or hidden fees, or plan administration failures.

Additionally, it seems ludicrous to me when an adviser collects a fee for 3(38) services, but the client has assets in self-directed brokerage. Unless each participant signs a separate 3(38) agreement, they are not covered under such a contract. Again, this is about investment selection. It's not about items that really can improve retirement outcomes.

So it stands to reason that the selection of an investment isn't the problem when it comes to employees' retirement savings habits, or a plan's overall effectiveness. When I review a plan, I evaluate its complete financial health. Ninety percent of the client concerns I see include:

1.       Plans with compliance issues – late contributions, not following documents

2.       Plans that are still pushing paper and looking to create efficiencies

3.       Plan designs that need improvement or recalibration

4.       Payroll bridge or lack thereof

5.       Risk reduction by outsourcing hardship approval, loan approval, qualified domestic relations order (QDRO), etc.

6.       An auto features' cost analysis is needed

7.       The plan needs to be re-introduced as a valued benefit by enhancing participant communications

8.       The plan's “health” needs to be measured based on income replacement ratios  

9.       Participants need a “financial wellness” program

10.    The sponsor needs to select a new qualified default investment alternative (QDIA) for its plan

11.    The plan's stable value options and retirement income products need evaluation

12.    There needs to be a vendor liaison in place

13.    The fiduciary governance needs improvement, i.e., committee oversight, bylaws, minutes, etc.

Which of these is a problem that hiring a 3(38) adviser will solve? Well, a few, but most still require involvement and oversight from a plan sponsor and/or committee, if one exists. As far as an investment selection is concerned, the plan sponsors I work with want to hear about investment options, but they also want to be a part of the decision-making process. The term 3(38) means I would make the decisions myself and inform them of those decisions. In my experience, the sponsors I work with don’t want that.

In some situations, however, an adviser who has discretionary authority over the investment selection can provide value. For example, a firm for which the business owner is too busy to focus on the retirement plan, or a company that is actively engaged in mergers & acquisitions (M&A), and therefore unable to focus on the plan's conversion, may benefit from a 3(38) adviser.

The retirement industry needs true plan consultants – to evaluate sponsors' current problems and show them how to improve their plans' total outcomes.  I want to see the results of using a 3(38) adviser versus any other specialized retirement plan consultant, and proof that a 3(38) adviser's success helped participants reach the retirement finish line. I don't think it's possible, so until then, I am going to continue to proclaim that 3(38) advisers aren't responsible for successful retirement plans.  

The real formula for a successful plan is simple:

1)       Commitment from leadership that demonstrates the retirement plan is important to them

2)       An active and engaged decision-making committee

3)       Decision-makers who are willing to listen to and implement new ideas

With those three pieces in place, a plan committee can revolutionize the retirement success for every participant.

I commend advisers who are dedicated to participant education, and our industry for embracing the term “retirement readiness.” Those are solid steps toward addressing the broader issue, which is, I believe, employees' overall reluctance to save for this vague, future goal we call retirement, as well as their general apathy toward employer-sponsored retirement plans.

The bottom line is, it's nearly impossible for participants to invest their way to the finish line.  Saving money is 99% of the work – which cannot be impacted by fiduciary services like 3(38).

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Securities are offered through LPL Financial, Member FINRA/SIPC.  Investment advice offered through Independent Financial Partners (IFP) a registered investment adviser.   IFP and Chepenik Financial are separate entities from LPL Financial.

What Women Want from Advisers

If advisers want to score satisfaction points with their female clients, they need to deliver holistic advice and become active listeners.

Sometimes it’s getting back to the simple things, like making sure both partners in a relationship are participating in a conversation, says Jaylene Howard, consulting director for Russell Investment’s U.S. private client consulting group.

Recent research from the global asset manager, “What really matters to women investors,” explores the financial needs of women in two age groups—Generation X, ages 32 to 47, and the Silent Generation, ages 67 to 80—and includes insights from financial advisers who serve female investors.

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The same goes for follow-up, Howard tells PLANADVISER. “Don’t follow up just one,” she says. “Include both partners in all communications.” Since women have a tendency to hang back in financial discussions, Howard suggests opportunities to invite them into the conversation.

“Be proactive in the communications you send,” Howard suggests. Russell’s research shows that Gen X women in particular turn to websites, blogs and other sources to seek investment information. “Advisers can send an email that refers to a previous conversation,” she suggests. The adviser can bring up a topic that was raised previously and send a link to an article, along with an email that says, for instance, “In our last conversation you mentioned you were particularly interest in estate planning.”

A substantial majority of women in the survey (86% of Generation X and 87% of Silent Generation women) cited active listening skills as the most important factor to a successful and lasting relationship with their advisers.

Active listening is a skill, according to Howard, which is good news: “You can get better at it,” she says. “It’s a way to communicate that requires that the listener share back what they hear from the speaker. Focus first on understanding the client.”

The adviser should be empathetic, nonjudgmental and listen with undivided attention, noting words as well as body language, Howard says. Repeating and paraphrasing the client’s statements helps establish a base level of communication.

Keeping an Adviser

One surprising finding of the study, contrary to a commonly cited industry belief, a majority of women (93% of Silent Generation and 78% of Generation X) would stay with their current adviser, even after the death of a spouse or partner.

Howard feels that multiple factors could be responsible for this. “Coming out of the global financial crisis, clients demanded a much higher level of interaction from their advisers,” she says. “What we’re seeing now is that really good advisers use that demand as an opportunity to strengthen their relationships with their clients.”

The financial crisis might play a part, according to Howard, since it may have served as a catalyst to galvanize women into greater activity in their financial lives. “They saw their account values drop, and if they weren’t being active, that was a catalyst,” she says. The rebounding of equity markets over the past five years could also be a factor.

Howard says a notable finding of the research was the need for advisers to establish personal connections, particularly for women in the Silent Generation. “Women want holistic wealth management,” Howard says. The advisers who have the highest satisfaction ratings from clients understand more than simple financial facts. They have a complete picture of a client’s life.

“We were surprised, given the level of satisfaction with advisers, that no more than one in three advisers knows everything about a client’s financial goals and concerns,” Howard says. The advisers knew where the money was invested, and what financial products the client had. They knew less about more personal financial goals, such as saving for a child’s education or leaving a legacy.

Women Lack Confidence

Women may participate more but they still lack confidence, according to Russell’s findings. “Advisers have an opportunity to bridge that confidence gap,” Howard says, “by reaching out more, listening, and being proactive.”

“The most influential piece is active listening,” Howard says, “and it is the one that can really change the relationship for the adviser, too.” The more an adviser can get a client to open up and share her financial concerns and goals, the more possible it is for the adviser to help a client attain those goals.

Mathew Greenwald & Associates conducted two surveys in March 2013 on behalf of Russell Investments on women and investing, which focused on financial advisers and women investors in two age groups: Generation X (ages 32 to 47) and the Silent Generation (ages 67 to 80). One survey queried advisers about their relationships with women investors in these groups and the other sought out the woman investor’s point of view for each generation.

The adviser survey includes the results of 343 respondents, while the women investor survey includes 901 individuals (501 Gen X and 400 Silent Generation). In order to qualify for the study, women investors were required to have at least $100,000 in investable assets (Gen X) or $500,000 in investable assets (Silent Generation); work with a professional financial adviser; and meet the age requirements mentioned above.

Advisers who participated had to be employed as an independent financial adviser, planner, or RIA, or work for a wirehouse or national firm, regional broker/dealer, or independent broker/dealer for at least three years. They needed to generate at least 75% of their business from the sale of individual products and services and earn at least $100,000 in personal income from the sale of financial products and services.

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