In Practice October 1, 2018

PANC 2018: Transformation in the Small Business Market

Significant transformation is happening in the small business retirement plan market; what does this mean for the fiduciary adviser community?

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Presenting to the 2018 PLANADVISER National Conference in Orlando, David Musto, president of Ascensus, framed some of the key challenges facing Americans as they pursue retirement security by telling the stories of his uncle and father.

Musto’s uncle Anthony lived what many would think of as the American dream, at least in part. He went from humble and modest means to growing and transforming several small businesses. Starting his career as a truck driver for Kraft, he eventually moved into a food brokerage business, afterward creating his own import and marketing businesses.

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“Anthony’s story shows the drive of the small business person,” Muston suggested. “But his later life shows the other side of the picture. He worked for himself his whole life, and as a result he lacked a benefits department and a focus on long-term planning. When he had health issues later in life, it was not an enjoyable retirement experience, to say the least. Especially in the last few years of his life. He died with relatively little even after such a dynamic and successful career.”

Musto compared this story with his father—Anthony’s brother—who worked for Bell Labs for 36 years, with both defined contribution (DC) plan and defined benefit (DB) plan savings opportunities. Today, Musto’s father and mother are living a happy and secure retirement.

“It shows the corporate retirement plan system is powerful, representing one of the chief ways for Americans to create lasting lifetime wealth,” Musto said.

According to Musto, small businesses cover roughly 48% of the U.S. work force, and they account for something like 63% of new job creation. At the same time, 81% of small businesses have no employees outside the owner’s immediate family, while 29% are minority owned, and 45% are owned at least partially by women.

“Many of these owners resemble my uncle Anthony,” Musto said. “More than half, 51%, are 50 years or older.”

Musto noted that many of the same challenges facing the small business community when it comes to retirement planning also face workers in the “gig economy,” which represents nearly 21 million people in the U.S.

“Like employees of small businesses, unfortunately, gig workers make significantly less on an annual basis and have very little access to workplace planning,” Musto warned. “And take note, gig workers are not just young people. Thirty-seven percent of the gig economy are workers who are 55 or older, and increasingly, this group also includes higher skill works, such as lawyers and engineers.”

Musto appealed to PANC attendees to take up the task of helping these under-served groups. There may be some surprisingly big opportunities out there, he added, pointing to the examples of Lyft and Urber starting to offer payroll deductions for individual retirement accounts. 

“They’re even offering financial planning,” Musto said.

Musto noted how the advantages that large employers have in the DC space—the professionalization of management and the economies of scale—can be replicated for small businesses in a variety of ways. The most obvious pathway is open multiple employer plans (MEPs) and the government administered IRA or marketplace approaches being created already in various states.

“Clearly, small companies have the best interest in mind for their workers’ retirement, but they face serious obstacles,” Musto said. “Chiefly, these are cost, lack of staff, fiduciary concerns, and volatility of earnings.”

Musto concluded by voicing optimism about the increased collaboration between third-party administrators (TPAs), recordkeepers and fiduciary advisers.

“We see significant growth in use of TPAs and fiduciary advisory services going together,” Musto said. “By quarterbacking providers as a discretionary fiduciary, this is one way the adviser can support small clients as they track and manage their myriad responsibilities. There is tremendous potential here for efficiency, even as small business owners are very cautious about fiduciary responsibilities. Working with a TPA, the adviser as at 3(21) or 3(38), can efficiently deliver a complete fiduciary solution.”

In Practice October 1, 2018

PANC 2018: Future Faces of Advising

In order to remain relevant, speakers said, the retirement plan industry must become more diverse.

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During the “Future Faces of Advising” panel at the 2018 PLANADVISER National Conference, an audience poll revealed that retirement plan advisory practices do have some diversity on their teams, in terms of having women and/or minorities on the staff. The poll disclosed that 40% have less than 20% of their staff being diverse, but for 23%, it is between 20% and 49%, and for 14%, it is 50%.

Another audience poll question, about how much diversity is on the committees that retirement plan advisers are working with, showed that 54% of these committees are diverse—suggesting that if advisers want to align with their plan sponsor clients, their teams need to become more diverse.

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Yet another question revealed that advisers are aware of the importance of becoming more diverse, with 32% saying it is very important for their practice, and 46% saying it is somewhat important.

The panel included Melissa Cowan, executive director at Morgan Stanley, also vice president of the Women in Pensions Network, which has 700 members and 20 chapters around the country. The aim of the network is to “elevate women into the role of financial adviser, which, for many, they may not be comfortable with.” Keith Gredys, chairman and CEO of Kidder Advisers, LLC, said he is “always trying to push the envelope.” Kidder Advisers’ third-party administrator team is 75%  female, but its adviser team is 80% male, he said. “There are obstacles that need to be overcome,” he said. “Demographics are changing, and we need to stay relevant.”

Emphasizing her point, Morgan Stanley “would not hire a group that doesn’t embrace diversity,” Cowan said. “Without diversity, you can’t get the best and the brightest. Folks want diversity on their teams but have difficulty getting there.”

Diversity also means hiring young people, Cowan said. The benefit of doing so is that you gain “different perspectives,” she said. It also gives you insight into what younger people want from their retirement plan and has the added benefit of naturally creating a succession plan, Gredys said.

Many of the requests for proposal (RFPs) that sponsors are issuing today ask directly about the construction of the team, the panelists agreed. Some sponsors say they are expressly looking to hire minority-owned or diverse businesses. If a practice is neither of those things, it may not even get in the door to do a presentation.

As a whole, the retirement plan industry needs to figure out a way to attract women and minorities to join the field, Gredys said. “There is still this feeling that being an adviser or broker is shady,” he said. 

Suggesting another potential solution, Morgan Stanley has a specific program to help women re-enter the workforce after raising their children, Cowan said. Another potential source of candidates could be community colleges, Gredys said. Another is an internship program, he added.

In order to make retirement planning a more attractive career path, he continued, the industry needs to make this goal “a priority” and persistently address it. “Educate potential candidates that this business is about relationships,” Gredys said. “We have to move quickly because advisers’ average age is mid-50s. This is a cultural change we need to address.”

Cowan noted that many women are afraid to move into sales jobs. “Change the description of these roles,” she suggested.

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