Alfred Hammond, Institutional Consulting Director of Graystone Consulting (Morgan Stanley Smith Barney); Manuel Rosado, Vice President of Spectrum Investment Advisors; and Chad Wilson, Director of Investment Consulting for PSA Financial Advisors, were the panelists for this discussion and honed in on the following five topics.
1. Marketing their 401(k).
Hammond of Graystone said there has been a change in approach to “pitching” 401(k) plans to employees. “Traditionally, the plan sponsor would put the plan out there and participants picked it up. Now, they’re trying to market it as a benefit,” he said. He also pointed out that the education is changing; it’s becoming more paternalistic. “[Sponsors] are reaching out, they’re making sure participants are doing what they need to,” he said.
Hammond also noted that more sponsors are choosing to market the plan using their company’s brand, versus that of the provider. He said the reason for this is that since the recession, people think negatively of the big financial services firms. So instead of buying into the “Fidelity plan” or the “Merrill Lynch plan,” for example–sponsors arehaving better luck with participation if it’s seen as the “Company plan.”
2. Focusing on benefit adequacy.
Rosado of Spectrum said that because 401(k)s have become so common, enrollment alone isn’t enough–participants have to be educated so they understand the realities of retirement planning in today’s world. “There’s been a participant mentality that ‘I’m going to retire at a specific age.’ We need better education that teaches participants they can retire when they’ve saved enough. Only teachers, police and firefighters can say they’re going to retire at a certain age. Everyone else needs to do the math.”
Wilson of PSA continued this idea by saying many defined contribution participants “still think they have some sort of pension-type benefit coming to them at the end when they hit 65 but they won’t have that; people have expectations that aren’t real,” he said.
Wilson said education would be a nice solution, but “inertia rules…you can educate people until they’re blue in the face, but they’re still not going to save enough.” He said benefit adequacy will have to be dealt with on the plan design level (dealing with auto-features).
However, Rosado also said advisers should take better advantage of the data that is out there in order to reach participants. He discussed technology platforms that are available to help participants see their “gaps,” which may make the situation–the potentially critical situation–more meaningful to them.
“[Seeing the gaps] is a hard pill to swallow but we have to bring it up. We have to move pass enrollment alone. We’ve hired part-time retirees to give their perspective, to help us talk to other participants because they have that level of credibility,” said Rosado.
3. Understanding plan costs and fees.
The panelists said advisers can make a big impact by helping sponsors sort through provider fees. Wilson said his firm has fiduciary education modules that they go through with clients and one of them is about plan costs–“but it’s still confusing, we often have to go through it more than once [with the sponsor].” He said talking about plan costs and fees is easiest to do during the RFP process. Once a provider has already been servicing a plan for years, the costs become more difficult to decipher.
Hammond agreed and added that larger plans typically have an easier time getting ahold of fees from the provider. It’s more difficult for smaller plans to get the same level of transparency. The panelists all said this was the case, and found it to be quiet troubling. Rosado said this is where benchmarking really comes into play–the adviser is supposed to be able to see if the fees are too high and should be negotiated down, or if it’s time to start “shopping around.” Sponsors can’t do that on their own, he concluded.
4. Proper evaluation of target-date funds (TDFs).
Rosado said sponsors are getting too caught up in the performance of TDFs, when really it’s the asset allocation strategy that is most important to understand. He said advisers need to “look under the hood” of a TDF–many are loaded with subpar funds that wouldn’t attract investors as a stand-alone investment, and then some of the better-performing funds are left out.
5. Getting the most out of plan design.
The panelists said many sponsors haven’t evaluated their plan in years. Ask them things like, “What’s the goal of this plan?” Is it to attract new employees? Does the plan have a large portion of workers nearing retirement? Do we need to re-vamp the education strategy? Sponsors who follow the markets are great, panelists said, but retirement plans are much more than investment strategies alone.