In Practice May 4, 2018

Client Service Q&A Part Two: Practice Differentiation and a Shifting Employment Landscape

Following up on a broad discussion of market volatility, John Diehl, SVP of strategic markets for Hartford Funds, encourages advisers to consider new means to separate their service offerings from the competition; he also offers a sneak peek at some forthcoming research produced in partnership with the MIT AgeLab. 

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John Diehl, senior vice president of strategic markets for Hartford Funds, spends a lot of time talking and strategizing with retirement specialist financial advisers; in a sense he is an adviser’s adviser.

Recently, Diehl sat down for a wide ranging conversation with PLANADVISER, following up on a previous interview he offered in February, when U.S. equity market volatility came back onto the scene in a big way. In part one of the follow-up discussion, Diehl addressed the most recent bout of market volatility and how advisers and their clients have responded. After that, the conversation moved to the always timely subject of boosting practice differentiation and client satisfaction.

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PLANADVISER: In your position speaking regularly with retirement specialist advisers about their growth and client retention strategies, do you see evidence that advisory services are becoming more “commoditized,” similar to the way some argue that recordkeeping services offered by various providers have become less differentiated over time?

John Diehl: For retirement plan advisers, it is certainly a challenge to differentiate themselves from their competitors, but they are not sitting back and passively allowing their business outlook to deteriorate. One way that I have seen firms have real success building a unique and powerful brand is by providing insights and ideas that are not just specifically attached to the retirement plan. They are plugging into all the other challenges that plan sponsors and HR benefits professionals are facing, and bringing to bear solutions and strategies that go beyond traditional DC or pension plan consulting. They are able to demonstrate how the retirement plan and all the other benefits and HR issues run together—helping to customize and maximize compensation and benefits in a holistic way. Leading retirement plan advisers are playing a role in helping employers to confront their broader workforce challenges.

PA: It is interesting to hear you say that, working as you do with many different advisory firms. How do advisers think about doing this work in terms of compensation and allocating staff resources? This might not be a direct way for an adviser to make a whole bunch of extra money, engaging in these non-investment related conversations, but it is something that can really increase client confidence and loyalty, isn’t that right?

JD: Yes, I do think that is right. Both in the retail investment advice space and in the DC industry, there is an understanding among advisers that strong investment performance has been commoditized. It is not that delivering strong returns is not important—it is just expected. And so advisers cannot simply talk about strong investment returns and expect to win a lot of new DC plan or retail clients.

In the retirement plan space, especially, where the RFP and RFI process continues to become more important, many advisers are trying to find ways to separate their offerings from what their peers are putting forward. They all can help deliver powerful automatic plan features and all the other bells and whistles associated with DC plans these days. Where there is opportunity to break out of this commoditization and to do something unique is to do what we just talked about—to expand your subject matter expertise and your capabilities, either internally or through partnerships, to help employers manage their employees’ broader financial wellness.

In addition to doing the traditional elements well—investment performance and fiduciary oversight—the adviser is now being called on to have broader conversations about education, wellness and workforce management. Advisers may be called on to discuss tax optimization, Social Security, retirement income solutions, you name it. 

PA: Speaking of partnerships, I understand your role at Hartford Funds includes overseeing the relationship with the Massachusetts Institute of Technology (MIT) AgeLab. The relationship has existed for a few years now. How has that partnership been going?

JD: I’m glad you asked about that, because the relationship is going great. We are doing a focus project right now in fact that will be of interest to your readers, where we are analyzing the ‘workplace in transition.’

As a sneak peek, I can tell you we are looking closely at labor force participation numbers, and we are seeing evidence to the effect that most of the older age groups in the workforce are growing at a pretty incredible rate. I’m talking about the over-age-65 and over-age-75 worker populations. Relative to the 2004 representation figure, the 65-to-74 group is projected to grow through 2024 by 4.5% per year. The over-age-75 group is projected to grow during that timeframe by over 6.5% per year.

Obviously these numbers are coming off a smaller base of people relative to younger groups of workers, but the evidence is clearly showing a real shift in the workforce dynamics. I think we can tie this to the fact that defined benefit plans have diminished and taken away the finish line that used to exist for a lot of people. Now with DC plans being more important, there is more of an open understanding of what it means to age in the workplace. Employers must take this into account and adjust their compensation, workforce recruiting and retention strategies.

Data & Research May 4, 2018

Confidence in Retirement Planning Correlates With Higher Retirement Income

Individuals who have an adviser are more likely to be on track to create adequate retirement income—by a wide margin, a study by Empower found.

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Empower has identified specific employee actions—which it calls “habits of success”—that correlate with significantly higher projected lifetime income when working years end.

In a white paper, “Scoring the Progress of Retirement Savers,” it says plan sponsors can foster these behaviors through various plan features, tools and access to professional advice.

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In Empower’s seventh study of how financially prepared Americans are for retirement, it found continuing improvement in many factors affecting lifetime income replacement percentages. The median projected income replacement among participants in its study was 64%. In other words, Americans are on track to replace 64% of their current income in retirement. However, Empower found a wide gap between those who have “habits of success” and those who don’t.

Two-thirds (67%) of households in Empower’s study report that at least one earner has a workplace retirement savings plan available. Participants who are eligible for a defined contribution (DC) plan and actively contributing have a median income replacement percentage of 79% compared to only 45% for those without access. The difference between current savers versus those who are eligible but not participating is significant. Current savers have a median income replacement percentage that is 25 percentage points above those who are eligible but not active in their plans.

The second major factor in generating a strong level of income replacement at retirement is how much a participant is contributing, Empower says. Its study found participants who contribute less than 3% of pay have a median lifetime income replacement percentage of less than 60%, while those who contribute 10% or more have a median retirement income replacement of more than 100%.

Empower suggests several steps plan sponsors can take to help facilitate savings—and higher levels of savings—within a plan. The first is automatic enrollment. Empower found an 11-point difference in median income replacement percentages between participants who enrolled automatically versus those who opted into the plan. A second feature that correlates with higher median income replacement is auto-escalation. The survey found that people who participate in a plan with this feature achieve a median retirement income replacement of 107%, 27 percentage points higher than participants in plans without it.

An employer match also affects employees’ saving behaviors—not only the fact there is a match, but the degree to which employees know what the match level is. Of those who know their match in the plan, 73% (56% of total survey participants) set their contributions accordingly. Empower says the opportunity area lies in the group that doesn’t know what their match level is. If these employees were more knowledgeable, they might well make different savings decisions to take full advantage of the match feature.

Empower explored what factors keep employees from participating when a plan is available—and what would have them begin or resume contributing. The greatest factor in beginning or resuming contributions cited was paying down debt (32%), followed by getting a raise (22%) and then reducing overall spending (12%).

Among participants who have access to an employer-provided savings plan, confidence that they are making the most of the plan to build retirement income is at a four-year high at 79%. In addition, among those who have a target retirement income (91% of survey participants), 57% are confident that they will be able to achieve that target income in retirement. Empower found that participants who are confident in various aspects of their retirement planning have projected income replacement results well above the survey median. “While the data only indicate correlation, not causality, the numbers suggest an opportunity area for employers. By offering planning support and tools that give employees a clear view of how much income they’re on track to replace—and how to generate better results for themselves—plan sponsors can better enable employee action and confidence in the future,” the white paper says.

Employees expressed interest in more personalized support for retirement planning and decision-making through their plans. With managed accounts, for example, an employee can work with a financial specialist on goal-setting, savings and investing strategies, approaches to minimize taxes on withdrawals, and effective responses to changing economic conditions. The majority of employees in the study—between 80% and 88%—find such features somewhat or very attractive.

The study also found those who have an adviser are more likely to be on track to create adequate retirement income—by a wide margin. Those who have a paid adviser have a median retirement progress score of 91% compared to only 58% for those without an adviser. The data indicates that one of the most important functions of a financial adviser is the creation of a formal financial plan. Those who have a formal plan have a median projected income replacement of 99%, while those without a formal plan are on track to achieve a median replacement level of only 58%.

Given the public debate regarding tax reform, Empower asked employees about the importance of the current tax treatment to their plan savings decisions. Individuals strongly value the pre-tax treatment of their employer-provided DC plan, and these benefits have a direct impact on contribution levels. At almost any level of current contribution, employees say they would contribute less if the tax benefit were not available. In total, the responses suggest adjusting taxes on retirement savings contributions would reduce deferrals by nearly 20%. Respondents earning less than $50,000 annually predicted a greater percentage drop in contributions (28%) compared to those earning $50,000 or more, should tax benefits alter.

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