Fiduciary Concerns on the Rise, Advisers Say

Three out of four advisers have observed heightened fiduciary concerns from plan sponsors since last year, according to a survey by Putnam Investments.

The Putnam survey of 154 retirement plan advisers found that advisers see fiduciary concerns as an important issue for plan sponsors; favor target-date-type products; and, amid fee regulation, think their fees are on par with industry standards. The advisers surveyed were seasoned in the retirement business: 75% have been in the business for more than five years, and for about two-thirds (64.9%) of the advisers, retirement plans make up 75% or more of their new business.

The number of advisers who choose to act as fiduciary or co-fiduciary verse those that do not is relatively split. According to the survey data, almost half of advisers now act as fiduciary or co-fiduciary for the plans they manage; 51% do not sign as fiduciary.

Advisers surveyed said fiduciary tool kits provide the most valuable support to them and their clients (92% listed them as “critical” or “valuable”), followed by fiduciary insurance (74%) and warranty or guarantee programs with shared responsibility (65%).

Staying in Line

The majority of respondents said they feel their fees are reasonable and in line with industry standards (73.2%), but many are looking to compare their fees with industry standards, the survey found.

Adviser respondents said they would likely take a variety of steps in response to current legislation pertaining to the reasonableness of 401(k) fees. The largest number (46.6%) said they would need to provide industry statistics to position their compensation in relation to the industry average. Almost 40% said they will undertake a review of all fees related to the investment options and search for lower fee replacements. A chunk of advisers (28%) also said they will complete an RFP to be sure they are getting the most value in terms of services and investments. About 20% said they will consider index funds as a cheaper alternative, and about 24% answered “none of the above’ (advisers were allowed to select more than one response).

Level basis point compensation (44%) and traditional commission-based models (30%) comprise the bulk of payment methods for advisers, with 44% and 30% of advisers citing these as their primary compensation structure, respectively. The other compensation structures included direct payment from the sponsor, both subsidized (10%) and out of pocket (13%), as well as flat dollar payment from the provider (3%).

Choosing the Target

Advisers are overwhelmingly using target-date and target-risk funds as default options, with about 91% of advisers indicating that they primarily recommend these two default options. Slivers of advisers said they recommend a managed account provider to sponsors (4.4%), and a similar number (5.3%) continue to recommend stable value products as part of a capital preservation strategy.

When recommending target-date funds, asset allocation is the most important criterion (after performance) for about 36% of advisers. After asset allocation, the next largest criteria were expense ratios (17%), glide path (13%), and a track record of more than three years (13%).

Target-date mutual funds and balanced mutual funds stood out as single-family options in the survey. When asked whether they advise sponsors to use multi-manager or single family products, more than half (53%) of advisers said they suggest single-family products for target-date mutual funds, and 59% suggest single-family balanced mutual funds. However, multi-manager products were attractive for target-risk mutual funds (cited by 66% of advisers), non-registered products including common trust funds and comingled funds (95%), and managed accounts (90%).

“In the new era of qualified default investment alternatives (QDIAs), 401(k) advisers and consultants strongly favor target-date type products, and have given careful consideration to their evaluation process,’ said David Tyrie, managing director and director of retirement services at Putnam Investments. “What’s clear, too, from our poll is that plan sponsors are increasingly concerned with fiduciary issues. They are relying more heavily on advisers and consultants to provide fiduciary support through their service model or in the form of fiduciary toolkits, fiduciary insurance, or other programs.’

Participant and Sponsor Action

Although the significant majority of advisers said that plan participants in the plans they manage are continuing to contribute to their 401(k) accounts, unfortunately 21.1% say that participants are decreasing their contributions to the plan.

Also, despite the current economic and market conditions, plan sponsors appear to be committed to their retirement plans; 84.6% of advisers say their plan sponsor clients are continuing to provide the matching contributions at the current level. However, some advisers say sponsors are delaying auto-enrollment decisions (7.4%), continuing to provide profit-sharing contributions (5.4%), and delaying adoption of the QDIA-sanctioned investment options (2.7%).