The annual research from Fidelity Investments found “preparing employees for retirement” is the most commonly identified goal for retirement plan sponsors in 2014. Jordan Burgess, senior vice president and head of defined contribution investment only (DCIO) sales for Fidelity Financial Advisor Solutions, discussed the findings with PLANADVISER prior to publication. He said the 2014 update marks an important turning point for the ongoing research project.
“We’re seeing the conversation between plan sponsors and advisers is starting to change,” Burgess explained. “There is still less than a majority of plan sponsors who say improving outcomes is their top priority, at 37%, but this is a trend we expect to continue. We believe it’s a combination of all the effort being made by providers, thought leaders and even the media to create more of a focus on the end participant.”
The other most common goals, which for the first time fell below improving outcomes, include reducing business costs related to the plan (28%) and using the plan to attract new employees (24%). Burgess suggested the plurality of goals identified by the study makes sense—each plan sponsor has different objectives and expectations for their retirement plan. There’s one area, however, where sponsors continue to come into alignment: adviser use.
“We’re really seeing remarkable growth in the opportunity set for retirement specialist advisers,” Burgess said. “As recently as 2012, we saw only about three-quarters of plan sponsors retained an adviser specifically to serve the retirement plan. Today, that number has grown to 90% plus.”
Burgess attributed the growth in adviser usage to increasing retirement plan sophistication. There may have been a time when plan sponsors did not have to think too deeply about their plans once the investment menu and performance monitoring were set up, he suggested, but that time is clearly over. Today, there are pressing questions around automatic enrollment, automatic escalation and the qualified default investment alternative, Burgess said, just to name a few.
“The specialists have done a good job of building interest in things like target-date funds, and of course they’re still making the case that it’s critical to monitor fees and the fiduciary responsibilities. All of these are things sponsors want help on,” Burgess said. “More and more, we expect sponsors’ attention to shift to things like improving plan design, rather than just looking at the fund lineup.”
Burgess said the research results “may require advisers to shift their mindset.” The retirement specialist adviser of the future may look more like a benefits design consultant, rather than an investment specialist.
“In addition to knowing their fees, funds and fiduciary responsibilities, advisers will also have to make sure they’re focused on retirement outcomes for employees,” he said. “Not just that, they’ll have to be able to demonstrate they are improving outcomes by making real changes and updates to the plan.”
This gets to another critical finding from the 2014 study. While plan sponsors reported higher levels of satisfaction with their advisers, they also noted higher expectations. Almost half of those surveyed, for example, said the need for more retirement plan expertise was the primary reason behind their most recent switch in advisers. In addition, plan sponsors said they are approached for plan business an average of five times a year, so it’s important for advisers to know what plan sponsors want out of a relationship, Burgess said.
“I can point to one anecdote that really underscores this case,” Burgess continued. “At a recent conference I had an adviser come up and say, ‘I was fired by a longtime client last week.’ He went on to describe all the services he would offer the plan, and they matched completely the services the new adviser would bring, and the pricing was comparable. So, why did he lose the plan?”
The lesson from the anecdote is simple, Burgess said, but also vital: If a plan sponsor client isn’t perceiving the value they are getting from advisory services, then that value won’t help the adviser retain the business.
“I like to tell advisers that they should be sitting down with their clients at least once each year to explain each and every thing they’re doing to improve and service the plan,” Burgess said. “That could mean something as simple as keeping track of all the hours you work on the plan. Ideally you will have metrics and reports that make the case very clearly as to why you should be the one serving the plan.”
Strikingly, fewer than 20% of sponsors in the Fidelity survey said that their adviser “consistently communicates the activities they perform for the plan.” The importance of regular updates and clear presentation of value cannot be overstated, Burgess added, as 100% of plan sponsors said they were highly or very highly satisfied with advisers who regularly supply reporting on how they have improved specific plan metrics.
“We’re talking about things like income replacement ratios, overall participation, portfolio diversification, stretching the match dollars, you name it,” Burgess explained. “This becomes even more important when you consider that about 13% of sponsors say they are currently looking to replace their existing adviser—which is a three-point increase over 2013.”
The other important consideration in the value-perception question, the report explains, is that 66% of sponsors don’t have any type of formal end-goal for plan participants. This can make it more challenging to understand what type of service or improvement a plan needs, Burgess said, in turn making it harder for the adviser to serve these plans successfully.
“We feel it’s absolutely critical to identify a goal for the end participants, and this goes back to what we said at the beginning, that sponsors’ attention is slowly shifting to deeper questions about what it means to offer a plan, and what the goals of the plan should be,” Burgess concluded. “At Fidelity, we start with a 50% lifetime income replacement ratio. Having this goal in mind helps tremendously on the plan design questions, on the fund menu questions, and really all the pieces of the plan an adviser hopes to serve.”
This year's survey compiles input from nearly 900 plan sponsors, ranging from start-ups to large established companies, who use a wide variety of recordkeepers. More information is available by contacting a Fidelity representative at 800-343-1492 or by visiting www.advisor.fidelity.com/DCIO.