Back in 2010, we realized that the 401(k) industry was centered on funds, fees and fiduciary governance—the legal/compliance part of our service—and not on the success of the people we ultimately serve. Even though the industry routinely educated people about plan designs, improved the investment menu, and measured participation and average deferral rates, participants were still hitting the normal retirement age without enough money to maintain their standard of living.
We decided to take a new path and started measuring and benchmarking outcomes. We followed up our education and advice services by focusing on how to use the plan to accomplish a goal: permanent vacations! Five years later—even though our firm had won several industry awards—we knew we hadn’t gone far enough. Many participants needed more than just plan advice. They needed financial life advice.
How could we expect tomorrow’s money—earmarked for retirement—to be on track when today’s money was a mess? We also realized advice can’t stop on the retirement date. It has to go through retirement, and it must be inclusive, not just for high-income earners and the wealthy.
So, in 2016, we re-engineered and rebranded our firm based on people-smarts and great technology to create a “next-generation 401(k) advisory service,” centered on taking a financial planning approach for every participant through our worksite financial wellness offering. This needed to be coordinated with our in-plan advice services to our participants, too.
Currently, the vast majority of 401(k) plans use target-date funds (TDFs) as their qualified default investment alternative (QDIA). But, with today’s technology, should all 45-year-olds be invested exactly the same way? Or, for that matter, all 30-year-olds? TDFs once made sense, but we believe that managed accounts are the natural evolution of in-plan advice for 401(k) and 403(b) plans.
This is more than just an asset-allocation service. It’s a personalized retirement savings strategy that can take into account both the participant’s current plan savings and their outside assets. Plus, it gives them plan savings rate recommendations, retirement withdrawal strategies and Social Security optimization. It brings a holistic financial planning approach to in-plan participant advice, enhancing participants’ ability to achieve retirement success by coordinating with their overall comprehensive financial plan.
Once thought to be overly expensive, price points for managed accounts have come down drastically, resulting in numerous clients converting their QDIAs to managed accounts. In our case, Morningstar’s technology platform allows us to be the 3(38) adviser on our clients’ managed accounts. We have had a 2,300-plus participant plan automatically invest every participant in our managed account program, and only 14 participants opted out of the service.
For advisers like us that routinely build five to 10 risk-based models for their plans, the Morningstar technology is incredibly useful. It takes into account 12 separate variables to give in-plan advice based on the entire participant. Ultimately, the solution delivers a goals-based financial planning approach that is integrated with many of the largest recordkeeping platforms.
401(k) advisory firms today need only look at many of the industry’s largest recordkeepers for verification of this financial planning emphasis. They are not only encouraging our clients to consider managed accounts, but they are actually offering formal financial planning services to our participants. How are we as an industry going to compete?
Brad and Grant Arends are co-founders of intellicents. Brad has worked in the retirement and employee benefits areas for over three decades, specializing in the service of plans covered by the Employee Retirement Income Security Act (ERISA). Grant has over two decades of experience in the retirement plan industry and loves helping his clients improve the daily lives of their most valuable asset—their employees.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.