PANC 2014: Risks and Retirement

Plan advisers have a great deal more work to do on ensuring participant retirement readiness.

Advisers’ responses to an audience poll during the kick-off session at the 2014 PLANADVISER National Conference indicated that their sponsor clients are far more concerned about their fiduciary risks (cited by 40%) and litigation risks (24%) than they are with their participants’ ability to successfully retire (18%).

That may be why 41% of the audience polled during the “Risks and Retirement” session said it is “somewhat unlikely” and 46% said it is “very unlikely” that the participants in their plans will have sufficient savings. That’s a total of 87% who have a dim outlook on the retirement outcomes of their plan participants.

Shining an even more intense light on the retirement readiness crisis at many plans, 77% of the audience members polled said that less than half of their clients’ participants are on the right retirement readiness track.

These distinct setbacks on retirement outcomes offer a very real—and pressing—opportunity for advisers, said Jim McCarthy, head of workplace and investment solutions at Morgan Stanley, and Phil Fiore, senior vice president, investments at UBS Financial Services Inc.

 “Plan sponsors are most concerned about fiduciary responsibilities because that’s where the headlines are,” Fiore said. “The real risk is participant-related. It’s the 6% game, the industry’s emphasis on automatically defaulting participants into, or advocating, an initial 3% savings rate with a 3% company match. That is our mistake.”

To get human resources, finance and even the company’s CEO to realize that 10% is the rate at which people should start their retirement savings—show them the demographic savings data of their plan, how many of their employees are likely to remain on their payroll past age 65 and how enormous their health care costs are going to be, Fiore said.

“Have those conversations with your plan sponsors,” he said, adding that UBS Financial advocates that by their mid-30s, people should be saving 15% to 16% of their salary, and if at all possible, the maximum $17,500 annual 401(k) contributions. In line with boosting savings, both speakers said they are big proponents of automatic enrollment, automatic escalation and re-enrollment.

If plan sponsors push back on these proactive efforts, give them 24 to 36 months to move the needle, to ratchet it up, McCarthy said. And if higher matching costs are a concern, Fiore said, suggest restructuring or “stretching” the match to double digits.

Plan advisers overwhelmingly agree, at least in theory, that “the most important message” retirement plan advisers give participants is to “save more/save 10%,” cited by 83% of the audience. That is followed by teaching them about “longevity risk” (9%) and “budgeting for retirement” (5%). No one in the audience cited “diversification,” perhaps due to target-date and other types of diversified asset allocation funds having become so prevalent.

3(38) Fiduciary Coverage

Besides retirement readiness and saving more, another tremendous opportunity for retirement plan advisers is offering 3(38) fiduciary services, Fiore and McCarthy said. Few plan sponsors have embraced 3(38) services, but could benefit tremendously from what McCarthy characterized as “low-cost insurance.”

When explaining the benefits of 3(38) versus 3(21) fiduciary services to his clients, McCarthy likens them to a plan sponsor paddling a canoe towards a waterfall. “A 3(21) fiduciary gets into the canoe with you,” he said. “The 3(38) gets in, and you get out.” This simple analogy helps plan sponsor clients understand the upsides of “having an investment fiduciary with discretionary powers—and moves sponsors to action. General counsel gets that,” McCarthy said, adding that for all the work they do, most 3(38) services are underpriced.

“There is true risk inherent with every plan,” Fiore said, noting that the Affordable Care Act is just one of a plethora of issues “overwhelming” today’s plan sponsors. “To add on a 401(k) fiduciary layer” complicates employers’ worries even further.

“The benefits of a retirement plan consultant taking that risk away from them, are significant enough that it should allow financial advisers to get a lot of business,” Fiore said. McCarthy added that these two current shortfalls in retirement plans—fiduciary coverage and retirement readiness—offer “great job security” for all retirement plan advisers.