2014 PLANADVISER National Conference

Keynote: Has the Fed Jumped the Shark?

In a time when corporate merger activity is benefiting CEOs and shareholders but creating few jobs, Bloomberg TV host Trish Regan, in the keynote speech at the 2014 PLANADVISER National Conference (PANC), explored which economic stimuli could benefit more Americans.

Regan, also a USA Today columnist and author, addressed a variety of macroeconomic trends, including the Federal Reserve Bank’s leadership in the wake of the global financial crisis. She recalled her astonishment when Lehman Brothers, one of the largest investment banks in the United States, in existence since 1850, declared bankruptcy in 2008. Comparing that with the economic situation we are in today, Regan said we have a tendency to run into bubbles, and the Fed plays a large role in that. “Are we running into another asset bubble of a different kind?” she said.

As Regan observed, the U.S. has recently seen some of the weakest annualized growth measured in a post-recession period. Retail sales are down, and the country will be lucky to see 3% gross domestic product (GDP) growth in the second half of this year. These realities are gloomy, but she suggested that the real danger could be the ongoing attempt to fight the last financial crisis.

“It’s the law of unintentional consequences,” she said of the Fed’s lasting stimulus-related efforts. “While the Fed is trying to fight the last crisis, it’s inadvertently creating another one.”

Regan specified several key problems in the U.S. economy. First, corporate mergers have resulted in increased stock prices and improved productivity; however, they do not produce positive benefits from a job-creation standpoint. There are currently 7.5 million Americans working part time who want to work full time but cannot find jobs, she said. To further complicate things, wages are lagging behind inflation.

Second, she said, many growing companies are receiving high valuations, sometimes before becoming profitable. She pointed specifically to the valuations for Uber, Snapchat and even the Los Angeles Clippers basketball team. She said the Fed could be driving up asset prices by making credit relatively easy to obtain. This issue of “cheap money” also affects retirement, she said, because retirees are constantly searching for yield and are getting involved in riskier investments.

The third problem Regan addressed was home sales. Although purchases might be up, much of the buying is being done by investors, not new homeowners. A lack of confidence persists in the market, she said.

Regan was quick to add that the Fed is not solely to blame for current macroeconomic challenges, which are affecting the largest corporations and individual retirement savers alike. Many problems stem from “regulatory overhang” from Washington. She pointed to fear in the industry that government tax-reform efforts might include securing new revenue at the expense of retirement-related tax credits.

What is the solution to all these problems? “We need to build demand in a slow economy,” she said. The Fed could play a huge part by raising interest rates and thereby incentivizing people to go out and buy now, before rates move even higher, she said.

In regard to Washington, Regan discussed a need for fiscal and monetary policy to work together, as the U.S. government impacts the economy with its policy- and decisionmaking.

Executive Roundtable

A poll taken during an executive roundtable panel at the 2014 PLANADVISER National Conference (PANC) found that 86% of attending advisers look to work force retirement readiness as an important benchmark.

Elaine Sarsynski, executive vice president of MassMutual’s retirement services division, called this a huge improvement over even the recent past. Formerly, many retirement specialist advisers viewed their primary job as building a solid investment menu, she said. Many advisers also typically focused on participant education meetings as a major value-add, despite a preponderance of evidence showing that participants struggle to absorb challenging investment and savings information.

Today, most retirement plan advisers understand that the investment menu is only a piece of their value proposition, she observed.

Chip Castille, head of BlackRock’s U.S. retirement group, said that not only is improving work force retirement readiness the right thing to do for participants, it will also be a critical component of winning business in the future.

Sponsors increasingly demand tools to benchmark retirement readiness, Castille added, pointing to his firm’s CoRI Indexes—short for “cost of living in retirement”—as an example. He noted that the CoRI Index tools were released last year and have since grown to be the second most popular Web tool or website across the entire BlackRock digital domain. He said advisers can use the tools to help demonstrate how they positively affect plan performance.

Tim Walsh, managing director of institutional product and portfolio management for TIAA-CREF, agreed about the value of such tools, noting that advisers can use them to “change the game on the way people think about successful retirement plans.

“It’s no longer just about having as many five-star funds on the menu as you can,” Walsh said. “We know that the fund lineup does very little to improve the plan outcomes if participants aren’t saving enough of their annual income. So today, it’s about getting participants to save more.”

Sponsors increasingly want strategies to help the 75% of participants who either do not use their plan at all or use it ineffectively.

 “As an industry, we are starting to realize that probably more than two-thirds of the success of an employer’s retirement program has to do with the plan design,” Sarsynski observed. “It’s clearly the auto-enrollment and auto-escalation that are having a monumental impact on things such as participation and average deferrals. And a good QDIA [qualified default investment alternative] is obviously important, as well.”

Home Office CEO Insights

The CEOs of Pershing and LPL Financial spoke about how their firms support advisers.

Pershing LLC, a BNY Mellon company, is celebrating its 75th anniversary in outsourcing financial services, said Ron DeCicco, CEO. Pershing, the nation’s seventh-largest registered investment adviser (RIA) custodian, custodies $1.6 trillion in assets, 20% of which are in retirement accounts.

“We provide solutions to our clients—independent broker/dealers [B/Ds], hedge funds and registered investment advisers—so they can serve the end-consumer,” DeCicco said. Pershing’s front end allows advisers to see their entire book of business, plus it offers model portfolios, a turn-key training program and fiduciary support, he said. Additionally, this November, Pershing is rolling out a retirement plan network, offering a suite of solutions to help advisers, B/Ds and RIAs grow their business.

LPL Financial is the largest independent B/D in the country and has 70 retirement-focused individuals who work with 1,500 advisers, said Chairman and CEO Mark Casady. These retirement plan advisers support 40,000 plans with $110 billion in assets. Additionally, LPL works with another 2,500 financial advisers, managing $390 billion in assets.

LPL retains 97% of its assets, “which tells me our clients are happy,” Casady said, adding that LPL has been attracting $20 billion in new assets every year. The firm has also become an adviser “recruiting machine,” having remained the market leader for recruiting advisers over the last four years, he said.

Casady attributes LPL’s tremendous success in attracting advisers to its “expertise in plan design, investment selection, automated rollovers and employee education,” in addition to a “range of technology solutions” that make advisers more efficient.

The biggest challenges Casady sees for advisers are threefold: first, fees and running an efficient practice; second, regulatory issues; and third, better wealth outcomes. LPL is able to help advisers with these challenges through its thought leadership and the 70 staffers dedicated to retirement plans, he said.

DeCicco noted that many advisers feel threatened by “robo-advisers,” yet technology can complement their business. He also noted that $59 trillion of wealth will be transferred to younger generations by 2040. “Don’t just get to know the patriarch, but [also] his heirs,” he said. “[Generations] X and Y do want advisers’ help, but they want different interaction.”

Enforcement and Litigation

These days, fee lawsuits pose the biggest threat to plan sponsors—and to advisers and consultants, as well.

This, said David Levine, principal with Groom Law Group, is due to retirement plan practices’ growing size—and attorneys’ pursuit of deep pockets.

“You are on their radar,” Levine said. “We all live in a land of fee disclosure now. In 2006, it was all about revenue sharing. The claims have now changed. Before, no one knew what a retirement plan’s fees were. Now, there’s a focus on share classes, which ostensibly should not be retail. Think of how the government went after Al Capone. He got caught for not paying his taxes. You can get in trouble for not documenting your due diligence and your processes.”

One of the biggest and most recent 401(k) fee litigation cases against retirement plans has been Tibble v. Edison International. At the end of August, the U.S. solicitor general filed an amicus brief asking the U.S. Supreme Court to determine whether the 9th Circuit should have decided to grant Edison the Employee Retirement Income Security Act (ERISA) six-year statute of limitations allowance; the lower court in the original case charged the plan’s fiduciaries with failing to pursue cheaper share classes for three mutual funds, Levine explained. At the heart of this case was the court’s finding that “Edison didn’t have the due diligence on record to find another share class,” Levine said. “An open statute of limitation could drag you, as an adviser, into the process.”

Of course, Levine said, “the diligence process varies. If you are looking at the investments in a large plan, you should be looking at them quarterly. The investment policy statement [IPS] should be short, sweet and aspirational. Document why you chose a particular share class, level of investments, fund with revenue sharing, and your criteria for the watch list. Fiduciary Benchmarks can be a great tool, or you can do an RFP [request for proposals], use internal resources or turn to DCIO [defined contribution investment only] providers.”

However, on top of this, retirement plan advisers not only need to select a benchmarking process, but also to justify “how you evaluate and update your benchmarking tool, and why you use that tool,” Levine said. “Minutes from the investment committee meetings should show that you spent time and caution making these evaluations, that you considered alternatives. Using words such as ‘discussed,’ ‘evaluated’ and ‘options’ are some of the strengths you can show. Don’t ever say ‘this could hurt the company’ or ‘cost the company,’” even though that may be implied.

Another important case has been Tussey v. ABB Inc., in which the plaintiffs sued ABB and its recordkeeper, Fidelity, claiming that revenue-sharing payments to Fidelity breached the plan’s fiduciary duties. The District Court awarded a total of $36.9 million against ABB and Fidelity, plus $13.4 million in attorneys’ fees. The plaintiff’s attorney, Jerome Schlichter of Schlichter Bogard & Denton, has told PLANADVISER this suggests that a win is on the horizon for another pending petition, with that case citing Tussey.

“Schlichter is a controversial figure piloting many class action fee litigation suits,” Levine said. Schlichter’s firm has brought a long list of cases involving claims of excessive fees against other companies, including Krueger v. Ameriprise Financial, Gordon v. MassMutual, Abbott v. Lockheed Martin, Grabek v. Northrop Grumman and Spano v. Boeing. “These types of lawsuits are $20 million, $30 million, $40 million cases. These are material figures for our clients. Insurance doesn’t always cover this,” Levine said. “Many of these fee cases have been wins, but in reality the only people who win are the attorneys.”

Asked to approximate the threshold for assets under management (AUM) that would signal to a plan sponsor and adviser that they should seek an institutional share class, Levine joked, “I’m on tape. I’m not giving a number.” However, he continued, “Each situation is unique, and you have to approach the decision much like the selection of a target-date fund [TDF]. You have to understand the demographics of your work force. When do you move out of a mutual fund to a separately managed account or a collective investment trust [CIT]?” It’s all about vetting your decision with the right questions and “documentation, to forestall litigation,” he said.

Washington Update

There is an extensive amount of regulatory rulemaking going on in Washington that could impact retirement plans in the months and years ahead, and major tax reform proposals are still on the table.

“Retirement policy is very much on the minds of Washington politicians, with two themes in play,” said Roberta Ufford, principal with Groom Law Group. “The first is tax reform, specifically with regard to what Washington views as the lost tax revenue that the retirement system has. Working with a 10-year projection, that doesn’t account for how these revenues are taxed when they are drawn down. As a result, there is talk about switching to Roth accounts or limiting contributions.”

The second key retirement issue that Washington politicians are kicking around is limited coverage, Ufford continued. Thus, regulators are now talking about “multiple employer plans [MEPs] that would shift fiduciary responsibilities from sponsors and make plans more attractive” to smaller businesses, she said. Legislators are also considering a saver’s credit, start-up credit and annuities, she said.

With the 40th anniversary of the Employee Retirement Income Security Act (ERISA) having just passed, in September, it is important to remember that the law “has evolved because it did not contemplate the retirement savings programs we have now,” said David Weiner, principal with David Weiner Legal.

Retirement plan advisers must also keep in mind that ERISA is “just a piece” of America’s retirement savings legislation, Ufford added. “There [are also] Social Security, municipal and state plans, 403(b) plans,” she said.

In regard to the Department of Labor (DOL)’s potential redefinition of the term “fiduciary,” and thus which service providers are fiduciaries, the department initially focused on “regulating when an adviser is giving advice on retirement plan distributions and stands to gain fees,” Weiner said.

The DOL has now extended its examination of the fiduciary process to include how funds are selected on an investment menu and how custodians price assets, Ufford said, making the pending regulation even more controversial.

Given the repeated delays on this ruling and the upcoming presidential election in 2016, it is unlikely the DOL will return to the drafting table anytime soon, Weiner said.

Additionally, there is a bill in the House of Representatives that would preclude the DOL from issuing this rule until the Securities and Exchange Commission (SEC) settles its rules of conduct for broker/dealers (B/Ds), Ufford added.

As to how a broadened definition of fiduciary—whenever it is finally adopted—would affect retirement plan advisers, “for those who are already a fiduciary, this would be good for you because you are already ahead of the game,” Ufford said. “But if you aren’t, you might have to jump into the pool; your affiliates and custodians may have to change their business model as well.”

Additionally, Weiner noted, advisers will need to “be aware of co-fiduciaries. Make sure to monitor their activities.”

Even if the new definition remains tabled, “the DOL is looking at the definition of fiduciary through enforcement, audits and litigation,” Ufford warned. In particular, the DOL has an ongoing fiduciary adviser compensation project centered on revenue sharing and disclosure, she said. “The DOL is looking at when advisers are receiving undisclosed compensation. The DOL is also looking at service providers and how you are paid through 12b-1 fees and other fees, such as for attending conferences,” she said.

Lastly, at the Internal Revenue Service (IRS), the most notable initiative is its recent allowance for retirement plans to offer qualified longevity annuity contracts (QLACs), Weiner said. However, only a very small percentage of plans have adopted QLACs, he said. “It’s a good first step—but contracts are limited to the lesser of $125,000 or 25% of an account balance, with minimum distributions at age 85.”

Investment Menus

As options proliferate on investment menus, retirement plan advisers will have their work cut out for them. Defined contribution (DC) plans often look upmarket to the larger plans for strategies and best practices, said Barbara Best, founding partner of Capital Strategies Investment Group. “Everything starts at the jumbo market and gets pushed downward,” she said.

Investment menus are no exception, Best said, pointing to statistics that show greater adoption of target-date funds (TDFs) in jumbo plans—84%. But micro plans are catching up, with 50% including TDFs in their investment lineups. Jumbo plans are much likelier to include money market and stable value options than are micro plans, and—no surprise—employer stock is used frequently in jumbo plans but infrequently in the micro-plan market. Brokerage windows are understandably more prevalent in jumbo plans, with their greater percentages of sophisticated and affluent participants.

When looking at the value proposition of a defined contribution (DC) adviser, it is clear that advisers offer their clients a range of services, said Dan Steele, defined contribution investment only (DCIO) national sales manager at BNY Mellon/Dreyfus. The one service that remains a constant is the choosing of the funds and the investment lineup.

Other aspects of a plan and the tools to serve it may change, said Steele, pointing to the growing consolidation among recordkeepers and the technological advancements in defined contribution plans. Some advisers do not act as fiduciaries, and some use passive investments. However, he stressed, “when you articulate your value proposition to your clients, picking investments needs to be a big piece of it.”

A frequent topic at BNY Mellon is the evolution of 401(k) lineups and the part that alternative investments play, Steele said. Not only can alternatives refer to many different types of assets, the term can mean different things in different channels. “In the DC market, alternatives are anything outside the non-equity style boxes,” said Steele. “We found a proliferation of equity options and not a lot of fixed income in DC plans.”

Steele called the performance disparity between defined contribution and defined benefit (DB) plans natural, and said one reason is the institutional investor management. But another is the variety of offerings in each type of plan: Whereas the average defined contribution plan has 60% U.S. equities, the average defined benefit plan has just 27%, he said. One reason for these choices is home-country bias.

Placing alternatives in the lineup should be accompanied by an explanation of their function in the portfolio. “We advocate the use of alternatives, not to boost absolute return but to dampen volatility,” Steele said, “and that’s what a lot of them do.”

Fixed Income and Stable Value

Since the financial crisis of 2008, investment managers and retirement plan advisers have learned to be far more cautious when creating and selecting a stable value fund.

“The market sell-off put many stable value funds under pressure, pushing them below par to the low 90s,” said David Solomon, vice president and head of retirement services at Goldman Sachs Asset Management (GSAM). On the other hand, “most of the stronger products attracted money despite the significant declines in other funds, pushing these funds to 101, 102 above par.”

Immediately following the crisis, many banks and insurance companies that offered wrap contracts exited that business due to the heightened sense of risk, Solomon said. For those that remained, “guidelines got much stricter and durations tightened, making the products more challenging to differentiate or [to] drive alpha. Wrap fees increased substantially.” The good news, however, is that in the past 12 to 24 months, “new wrappers have come in; there is more capacity and more liquidity in the market,” Solomon said.

As the financial crisis erupted and “banks were tipping, clients asked us—urgently—to review wrappers,” said Robert Kieckhefer, managing partner of The Kieckhefer Group. Before 2008, the stable value funds Kieckhefer used typically had between one and three wrappers. Now, the firm looks for funds with five to eight. That is one of the key lessons learned, along with carefully “looking at the funds’ holdings to see what they are invested in. You might not like all that you find.”

For a full 22 years before 2008, Spectrum Investment Advisers used a stable value fund from a single “annuity provider. That worked well with declining interest rates,” said James Marshall, Spectrum president. Now, Spectrum uses stable value funds “with multiple insurance wrappers from a dozen different fixed-income providers.”

Advisers also need to consider duration risk, Kieckhefer said. As a result, the stable value funds Kieckhefer recommends to clients “have maturities equivalent to a medium-term bond fund, to sustain a yield. These are not liquid investments.”

As to what duration of a put provision Goldman recommends to clients, Solomon said: “We believe in a 12-month put provision. If you want additional yield, a 24-month put might be more appropriate. You need to strike the right balance between liquidity and yield.”

Kieckhefer typically recommends stable value funds to clients for safety, rather than yield. “We aren’t crazy about chasing yield in stable value. We look to fixed income for yield,” he said. That’s why he is comfortable with a two-and-a-half-year put on a stable value fund.

For retirement plans with participants who are highly paid and job-secure, Kieckhefer might even recommend a stable value fund with a five-to-six-year put. “Many stable value funds are tailored to their audience—like higher education, which tends to have a stable work force.” Plan sponsors in such fields as higher education “can go after longer durations. Others have huge cycles in their business,” he said.

To evaluate a stable fund manager, Marshall said, “there isn’t a [provider such as] Morningstar to make it quick and easy.” He recommends that advisers “first, do a spreadsheet to look at duration. Next, look at the number of wrappers. [Third,] question whether the company has an adequate support team to do due diligence. Fourth, we recommend puts of 12 months or less.”

Should the economic environment start to indicate a pending rise in interest rates, Kieckhefer says he will recommend that his clients move out of a long-duration fund into alternatives, floating-rate funds and ultra-short bond funds.

Lifetime Income

As the conversation about retirement readiness expands to address managing finances after the retirement date, lifetime income in defined contribution (DC) plans is garnering more attention. But with these solutions come a number of difficult questions, involving safe harbor, plan sponsors’ fiduciary responsibilities and taxes.

One concern of plan sponsors is how difficult it might be to unwind a specific income product or remove it from the plan if they find a better choice, said Christopher Jones, chief investment officer (CIO) and executive vice president of investment management at Financial Engines.

Fiduciary lock-in is another issue, Jones said. The issue of guarantee does answer longevity protection, and certainly annuities are an important piece in reaching a solution. But this does not necessarily mean the product must be in the plan, he said.

One possibility is a managed account that allows for an annuity purchase to take place outside the plan, so that a plan sponsor may offer access to a stable income stream without having to put insurance into the plan—a solution that could appeal to both the participant and the plan sponsor. A key difference, Jones said, is this solution does not help participants decide whether and when to annuitize. “Very few people are comfortable annuitizing,” he said, pointing to behavioral reasons and safety concerns. “People are unwilling to translate an account balance into an income stream.” Later, when they have had a chance to acclimatize to retirement, perhaps in their 70s, they are more apt to see the benefit of longevity protection.

According to Jones, the reality is that not every person should have everything annuitized. “If a household needs more annual income, the best way to do that is to ‘buy’ more Social Security income. Defer the start date of your benefits and significantly increase the amount of payments—it’s a screamingly good deal, better than private insurance companies. Annuities are a core component and can be efficient and appropriate, but there are other ways to annuitize.”

“How is the average participant supposed to understand this whole concept of retirement income?” asked Michael Perry, president of Retirement Advisors LLC. “We’ve done a great job educating participants during the accumulation phase,” he pointed out. “We educated them very well on how to construct a portfolio based on their individual tolerance for risk. Now we want them to pay extra for a different idea, 10 years away from retirement.”

David Kaleda, a principal at Groom Law Group, cited possible concerns plan sponsors should weigh regarding their responsibility under the Employee Retirement Income Security Act (ERISA). “I think the current rule construct does work,” he said. “Even guaranteed products could fit, in the current scheme. [They] don’t fit neatly, and some would argue [they] don’t fit well.”

One issue is the shift in thinking that has occurred since the rules were put in place, Kaleda says. Accumulation—snowballing into the biggest possible account balance—was the main point at that time, with very little attention given to the concept of decumulation. How participants should spend this money and how they should make it last were simply not at the forefront of regulators’ and others’ thinking.

As an example, Kaleda pointed to the safe harbor regulations for qualified default investment alternatives (QDIAs). “Some people believe you could make the argument that a lot of guaranteed products and managed account products will fall under the QDIA,” he said. “I’ve heard from plan sponsors that they would rather see an actual safe harbor built in.”

Plan sponsors want to know: If they offer something in their plan that contains an insurance product, what impact would that have on their fiduciary duty? “The kicker is that the regulations focus on situations where the plan sponsor/fiduciary is making the decision to annuitize or purchase a product that is insurance, just one time,” Kaleda said. “Once the decision is made, the [participant] is outside the ERISA system and plan sponsors don’t have to worry,” he pointed out.

On tax issues, Kaleda mentioned the recent guidance on qualifying longevity annuity contracts. “If [you] have a deferred income annuity feature, also known as a QLAC, within a plan, the Treasury Department said you could implement those and not run into required minimum distribution [RMD] problems,” he said. “Whenever you add features like this, you always have to consider the tax ramifications as well as ERISA.”

Risks and Retirement

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

That may be why 87% of the audience polled during the session said it is “somewhat” or “very unlikely” the participants in their plans will have sufficient savings—a dim outlook on the retirement prospects of those 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 speakers 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 (HR), finance and even the company’s CEO to realize that 10% is the rate at which people should start their retirement savings, Fiore recommended showing 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 will be.

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

Plan Fee Challenges

Fees assessed in a retirement plan can have many different shapes and sizes, observed Vincent Morris, president of Bukaty Companies.

Many fee-related questions, especially those about share classes and revenue sharing, come with considerable complexity and controversy. On the recordkeeping side, it is easy for the lines to blur when using an Employee Retirement Income Security Act (ERISA) account or ERISA bucket, said Scott Liggett, director of ERISA oversight at Lawing Financial Inc./Qualified Plan Advisors. He explained that recordkeepers may remit revenue-sharing payments back to whomever generated the revenue, thereby helping to offset some of the subsidizing effect that occurs when some participants invest in low-fee, passively managed funds and others in higher-fee, actively managed funds.

 “Revenue equalization is the answer,” said Ellen Lander, principal, Renaissance Benefit Advisors Group. “It makes all the problems go away.” In the past, she said, retirement plans used only institutional shares, separate accounts or communal trusts, and someone—usually the employer—paid a fee for the necessary recordkeeping. Then, Lander said, the mutual fund industry stepped in and said it could make all the fees disappear; in actuality, it embedded the fees in the investments themselves, through 12b-1 revenue-sharing fees. “And we have all the problems we have today,” she said.

“Revenue equalization is a way to ensure that no matter what fund you invest in, you’re paying the same [recordkeeping] fee as everyone else,” Lander said, admitting that it can still be difficult to get some plan sponsor clients to adopt the practice.

The topic of leveling fees is an interesting one, as well as an interesting debate, said Attila Toth, partner and co-founder of Portfolio Evaluations Inc. “How do we get there?” he said. “Do we do it per head, or according to a revenue-sharing number?” In larger plans—those with $300 million or more—Toth said, he sees more interest in fee equalization, especially from the chief financial officer (CFO), who often is interested in being more transparent on retirement plan fees.

According to Morris, fees can be leveled in a number of ways. For example, advisers can seek out funds with institutional or lower share classes, as well as funds without revenue-sharing fees. In fact, some recordkeepers now offer fee levelization services, he said.

However, few recordkeepers offer fee levelization, Toth said. “More and more are talking about it, but are not yet implementing systems to be able to do it,” he said.

Toth cites fee accounting as a further issue; among those recordkeepers that do levelization, most do the accounting only quarterly. Some do it monthly, but just one or two do it on a daily basis, which is what the system would really require.

“If you’re a savvy investor,” Toth said, “you could time flows coming in and out of funds, which is unfair.”

Sponsor and Participant Education

Retirement plan sponsor and participant education is a three-part effort, said Chris Augelli, vice president for product marketing and business development at ADP.

“Lesson one is, maximize deferrals,” Augelli said. “Second is, diversify, and third is, measure and improve income replacement ratios. The job of the adviser is to ask: How can we deliver and measure and define all these things in a clear and digestible way?”

While it sounds like a simple enough program, Augelli and other panelists warned that conveying these three lessons to sponsors and plan participants is difficult. “For example, how do you define pre-retirement income?” Augelli said. “Is it the last five years of the participant’s career? The top five years of income? Or do you average all the working years?”

He pointed to the example of blood pressure testing and other highly standardized medical procedures as an ideal the retirement industry should strive toward. “You can go anywhere in the world and walk into a hospital, have your blood pressure checked, and get a number that means the same thing,” Augelli said. “We need to do something similar for retirement readiness metrics. We need to standardize the conversation and establish some true baselines to think about these issues.”

Rocco DiBruno, retirement group director at Thornburg Investment Management, agreed with that assessment. “Today, the demographics of the work force are so diverse by age and lifestyle and all the other factors,” he said. “As the adviser, you have to be able to customize the approach for individuals. One of your roles as the adviser is to make retirement real for them.”

DiBruno suggested that advisers could partner with the enrollment specialist resources commonly employed by recordkeepers, to develop customized messaging for different demographic segments in each plan. Advisers can be even more effective by utilizing data-mining resources to identify specific problems that may be prevalent in a given plan—perhaps many participants display age-inappropriate asset allocations, or there could be a heavy concentration in employer stock. Whatever the problems are, advisers should also work hard to put systems in place to measure education-related outcomes and the progress of their plans as a whole, DiBruno said.

“At the end of the day, one of the biggest questions is: Can you document the results of your education efforts?” he said.

Scott Buffington, vice president for national sales at MassMutual, stressed the importance of a holistic approach to advice, especially as employees’ overall benefits packages become increasingly complex and, at least in the case of health care, more expensive to maintain.

“Participants are telling us that they are more and more confused about their overall benefits programs,” he said. “With all that’s happening in health care reform, it has all become more confusing. So, we feel that providing advisers the tools to have a holistic benefits conversation is essential for the industry to move forward in the ways we are discussing. You don’t have to be an expert on health care or on life insurance, but you do need to understand the participant’s hierarchy of needs.”

Plan Design and Behavioral Finance

Retirement specialist advisers used to sell the idea of getting participants engaged, and encouraging them to allocate their savings appropriately—but these days, advisers must take a different approach.

Today’s successful adviser is more likely to convince hesitant plan sponsors and client executives to implement innovative plan design strategies and to benchmark capabilities that can help plan participants overcome nonproductive behaviors.

Matt Gulseth, a partner at independent retirement plan consulting firm Channel Financial, suggested that advisers would do well to follow industry leaders who are integrating the principals of behavioral finance into their efforts to best serve plan sponsor and participant clients. He added that more effective client service strategies, perhaps counterintuitively, do not necessarily involve more frequent education and training meetings for plan participants.

“As an industry, we used to work under a paradigm that the participant needs to take action, so our efforts were about giving them the education needed to do that,” Gulseth said. “But now with the PPA [Pension Protection Act] and all the new regulations expanding ‘auto’ features and default investments, it’s much more about getting the right plan design in place and taking advantage of participants’ inertia, rather than working against it.”

George Revoir, senior vice president for distribution at John Hancock Financial Services, was quick to remind attending advisers that not all automatic features are equal.

“We’re finally starting to admit that the investment menu and the diversification decisions, while important, are not going to matter much if the participants aren’t saving enough,” Revoir said. “So in this sense, auto-enrolling the plan population at 3% of salary is not a solution to the retirement readiness problem, at least not without aggressive auto-escalation tied in.”

Pressed by an audience question, Revoir suggested that a “perfect” defined contribution (DC) plan would “auto-enroll above 10% and get the participants into an automatically balanced account through the qualified default investment alternative [QDIA].”

This is where advanced benchmarking and articulate goal-setting become critical for successful advisers, said Derek Wallen, senior vice president for defined contribution investment only (DCIO) at Fidelity Investments. It sounds obvious, he said, but advisers who are willing to do a little number-crunching in setting the level of auto-enrollment and auto-escalation can create powerful plans for their clients. They can also build a compelling case to bring to client executives who may be skeptical about the importance or the possibility of improving retirement plan outcomes.

So, step one is for the adviser to work with a client’s plan committee and executives to identify how much income replacement the plan is trying to achieve, he explained.

“Whether [the replacement rate] is 25%, 50% or 75%, this type of a goal is absolutely necessary to do quality plan design,” Wallen said. “You need this type of goal to decide at what level you’ll auto-enroll the population and how significant the auto-escalation will be. If you go with auto features but they aren’t going to meet your end goal, then what’s the point?”

Of course, convincing many clients to spend more on the retirement plan via more aggressive auto features will be a challenge at companies less concerned with their workers’ retirement readiness. In these cases, the adviser might push approaches such as stretching the match.

“The bottom line is that, to be a successful adviser, you need to be empowered to aggressively address and push your clients on these things,” said Gulseth. “Lead them, don’t manage them, because they will be resistant to change based on fear of the unknown, fear that employees will revolt. But all the data we have suggests remarkably few people opt out of the auto features once they’re placed in the plan.”

Differentiating Your Brand

How best to develop a brand owes a huge amount to the pioneers of this business, who created brands where none existed, said Charlie Ruffel, founder and director of Asset International. The role of retirement specialist adviser has grown in a remarkably short time and created an extraordinary momentum for the industry. “The role that retirement partners play is well-understood,” Ruffel said, “and has changed our whole industry so much for the better.”

 “It’s extremely important to differentiate yourself,” said Randy Long, founder and managing principal of SageView Advisory Group. “In smaller firms, you are the brand. It’s the service model and the value you bring to individual clients.”

Being independent and conflict-free are still important, but they are the price of admission, said Rick Shoff, managing director of CAPTRUST Financial Advisors. “It’s harder to get in the game nowadays. Not every ticket gets you in the same seat. Plan sponsors definitely value not only that we are specialists, but that we have a proven and sustainable business and we’ve been doing this for a long time.”

Shoff noted that reputation becomes even more important because the hiring process is now generally conducted through requests for proposals (RFPs). “Being able to demonstrate depth and stability really matters,” he said. “We get to the finals 82% of the time, and we win 60%—and a lot of that has to do with how the plan sponsors now view us.”

Bill Chetney, CEO of Global Retirement Partners, said it was not long ago that plan sponsors wondered if they even needed an adviser. That has certainly changed, and he feels the marketplace has fully embraced the need for an adviser and consultant. “But in order to differentiate yourself and position yourself, you definitely need to have an area of specialization,” he said. Simply being a retirement specialist is not enough. Specialization in 403(b) plans or 457 plans, or focusing on a particular region or city, or on “some other connection that draws you together” is necessary, Chetney said.

The brand of the individual is just as important as the brand of a firm, according to Chetney. “People buy from the person in front of them,” he said.

Most important is the connection you forge with the committee or the folks you are presenting to, Long said. “A brand will get you in the door, but at the end of the day, it’s you as an individual and your team that will get the sale.”