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The Next Gen

Nearly a quarter-million advisers will retire in the next decade

Teamwork, technology, financial success and a distinct career path are the main concerns of the next generation of advisers, and addressing these points will be critical to the continued success of financial advisory firms, according to a Pershing survey of 357 advisers between the ages of 25 and 39.

Every year for the next decade, 12,000 to 16,000 advisers will retire, for a total of 237,000 leaving the industry. “It is evident that the financial advice industry will face a talent shortage in the coming years,” says Kim Dellarocca, director of segment marketing and practice management at Pershing. To compound the situation, “each day, the industry sees young advisers exit the industry and never return,” she says. “Firms need to think about how to recruit and retain younger advisers by understanding their drivers and motivations—and convey to them that being an adviser is a rewarding and fulfilling career.”

Financial gain is more a motivator for younger advisers, in the 25 to 39 age bracket, (23%) than those 60 and older (12%). However, while the younger advisers share their older cohorts’ interest in having a positive impact on the lives of their clients, this motivation is significantly lower for the younger generation than for those ages 60 and above (59% vs. 81%).

The biggest generational divide involves technology. Eighty-five percent of advisers ages 25 to 39 describe themselves as technology-embracing, compared with 56% of those ages 60 and up. The younger advisers are also more likely to think of themselves as organized (75% vs. 63%), go-getters (48% vs. 44%) and team-oriented (44% vs. 29%).

Additionally, they report stronger growth in their business—42% of those 25 to 39 say they are doing better than before, compared with 15% of those 60-plus. “Interestingly, those who report they are doing better than ever are significantly more likely to also report that their firms provide opportunities for advisers to advance their careers,” Pershing observed. “This indicates that firms that provide clear advancement opportunities may also provide greater motivation for advisers to realize their full potential.” —PA

RFPs to Benchmark Fees

Sponsors are issuing more RFPs but mostly as a guide

While more sponsors are asking recordkeepers for requests for proposals (RFPs), the majority of these searches are not to replace their recordkeeper but to gauge whether the fees they charge are reasonable.

“More than half of plan sponsors have indicated they are likely to conduct a search for a recordkeeper within the next two years,” says Kevin Chisholm, senior analyst at Cerulli Associates. “However, many of these plan sponsors have no intention of leaving their current recordkeeper.”

In Cerulli’s report “State of Large and Mega Defined Contribution Plans: Investment Innovation and the Plan Sponsor Perspective,” 41.9% of plan sponsors who intend to do a recordkeeper search in the next two years will use the RFP only to benchmark pricing. A mere 13% of plan sponsors said they expect to perform a search because they are actively seeking a new recordkeeper. “There is concern that the current emphasis on costs will increase the frequency of provider searches and force recordkeepers to rebid on plans before they become profitable,” Chisholm says. “About 60% of plans have been with their current recordkeeper for more than three years.”

The report examines the new ideas and products that have been developed for defined contribution (DC) plans in the large ($250 million to $1 billion) and mega (more than $1 billion) segments. It includes analysis of plan sponsors’ perspectives on their DC plans, including the likelihood the sponsors will implement new plan designs. 

The report provides advisers with a window into plan sponsor thinking via a proprietary survey administered to more than 250 plan sponsors. Other data contained in this report comes from surveys of defined-contribution-investment-only (DCIO) asset managers. More than 30 conversations with executives at recordkeepers, investment consultants and asset managers support the data and findings. —Rebecca Moore 

Tax Advantages Are Critical

Most investors believe tax advantages are vital to retirement success

A majority (83%) of investors say 401(k) and other tax-advantaged accounts are extremely (43%) or very (40%) important to a comfortable retirement.

According to the Wells Fargo/Gallup Investor and Retirement Optimism Index survey, 69% of respondents say it is extremely or very important that the president and Congress find ways to financially encourage every company to offer a 401(k) savings option. Additionally, 67% want the government to encourage all Americans to participate in their employer’s 401(k) savings option—and to enhance the role of the 401(k) as a retirement savings investment.

Sixty-six percent say it is extremely or very important that the president and Congress should allow Americans with 401(k) retirement savings to obtain more quality investment advice and allow Americans more investment flexibility with their 401(k)s.

The survey also found that 68% of nonretirees indicate a 401(k), individual retirement account (IRA), Keogh or other tax-advantaged retirement savings account will be a major source of their retirement income.

At the same time, just 27% of nonretirees say Social Security will be a major source of their future retirement income. This contrasts sharply with what current retirees say are their major income sources: More than half of current retirees say Social Security is a major source of their retirement income (54%), while 32% say the same regarding 401(k) and other tax-advantaged accounts.

A majority (58%) of investors think it is unlikely that the system will be there for today’s younger Americans when they retire. At the same time, 76% think strengthening Social Security for younger Americans should be a top national priority over the next four years. —Jay Polansky 

Focusing on Compliance

Results from Callan’s 2013 DC Trends Survey

As in 2012, the top priority for defined contribution (DC) plan sponsors throughout this year will be compliance, according to Callan’s 2013 DC Trends Survey.

Eighty-four percent of plan sponsors took steps to ensure that their plans are Employee Retirement Income Security Act (ERISA) Section 404(c) compliant. The percentage not knowing whether their plan is 404(c) compliant declined.  

The proportion of defined contribution plan sponsors that reviewed their plan’s investment policy statement (IPS) in the past year rose—to 63% in 2012 from 55% in 2011. More plan sponsors have a written plan fee payment policy in place now (41%) than in 2011 (38%), either as part of their IPS or as a separate document.

Among plan sponsors’ 2013 goals regarding plan fees, compliance with required Department of Labor (DOL) disclosures ranked third, after ensuring plan fees are reasonable and sufficiently monitoring and documenting the fees.

According to the survey, plan sponsors’ greatest challenge in complying with the DOL’s plan sponsor fee disclosure regulation is “understanding the requirements.” This is followed by “knowing what appropriate actions to take relating to the disclosures.” Many plan sponsors have had no issues with the DOL’s required participant disclosures, and “none” ranked high on the list for compliance challenges. Some sponsors noted that “all items are performed by recordkeeper,” meaning they believe they have effectively delegated this responsibility to their vendor.

More than four in 10 plans that use revenue-sharing to offset administrative expenses limit their disclosures about these offsets to what is required under ERISA
404(a)(5). However, 18% of plan sponsors do not know how revenue-sharing is disclosed.

Plan sponsors range widely in how they implement the DOL’s requirement to show participants a “broad-based securities market” benchmark in disclosures. The most common primary target-date benchmark in disclosures is a market index, such as the Standard & Poor’s (S&P) 500, Dow Jones Industrial Average (DJIA) or MSCI, followed by a third-party target-date index, such as Morningstar Lifetime Allocation Indexes, S&P Target Date Index or Dow Jones Target Date Indices. Nearly 14% of plan sponsors are unsure what benchmark is used in participant disclosures.

Most plans’ administration expenses are paid by participants and often at least partially paid through revenue-sharing. However, it is rare that all the funds in the lineup pay revenue-sharing (2%). Most commonly, 51% to 99% of a plan’s funds pay revenue-sharing. The proportion of plan sponsors unaware of whether their funds pay revenue-sharing declined materially in the past year—from one in five in 2011 to less than 7% in 2012. More than half of plans with revenue-sharing have an ERISA expense reimbursement account, up from just over one-third in 2011 and around one-quarter of plans in 2009. (continued on next page)

Focusing on Compliance (cont.)

Automatic Features 

Prevalence of automatic enrollment continues to hover at around 50% of plans, as it has for the past few years. Adoption of automatic contribution escalation continues to lag slightly behind automatic enrollment, with 43% of plans allowing participants to automatically increase deferral levels.

More than half of plan sponsors offering target-date or target-risk funds used the proprietary mutual fund or collective trust of their recordkeeper in 2012 (59%), and a slightly lower percentage (54%) intend to do so in 2013. The prevalence of passively managed target-date funds (TDFs) now marginally surpasses that of actively managed options (38% and 37%, respectively). Nearly two-thirds of plans (64%) offer target-date funds with some amount of indexing in the underlying fund allocation. In contrast, all-passive fund lineups are rare within DC plans (1%). 

Investments

Inflation ranks highest on plan sponsors’ list of concerns, followed closely by a double-dip recession. In 2012, 30% of plans added inflation-protection­-type funds, such as real return, real estate investment trusts (REITs) or Treasury inflation-protected securities (TIPS). One in 10 plan sponsors added alternatives. Another 14% added stand-alone emerging markets equity funds.

Most plan sponsors (74%) do not offer income-for-life solutions within their defined contribution plan. Prevalence of in-plan guaranteed income solutions remains low, at 7%, but increased materially from 1% in 2011. Nearly 14% of plan sponsors are somewhat or very likely to offer an in-plan guaranteed income-for-life solution this year. —Rebecca Moore  

Marriage Perk

Couples more likely to have retirement nest egg

THE Insured Retirement Institute (IRI) found 80% of married people have retirement savings, compared with only two-thirds of singles.

In addition, only 14% of married individuals prematurely tapped into retirement accounts during the past year, compared with 21% of singles. Married people are also more likely than singles to contribute to their retirement accounts regularly (67%, compared with 56% of singles).

This could explain why the married reported being more confident in their retirement outlook. Nearly 40% said they feel confident they will have enough to live on in retirement, while only 28% of singles said the same. Almost half (41%) of married individuals also said they believe their financial security will be better than their parents’, compared with only 26% of singles. 

Another possible reason the married predict a secure retirement could be that they plan to keep working. About 23% of them plan to postpone retirement, compared with 16% of singles.

IRI also found that the married: 

• Are more likely to have calculated a retirement savings goal—about 56% have done so, compared with about 41% of singles;
• Are more likely to have consulted with a financial planner—about half have done so, compared with 38% of singles; and
• Are less likely to rely on income from Social Security in retirement—37% expect that entitlement to be a major retirement income source, compared with about 53% of singles.  

—Corie Russell 

Bad Returns

Chasing performance does not pay

When making changes to a 401(k) plan’s investment lineup, administrators chase returns and ultimately fail to improve investment performance, research suggests.

During the period analyzed by researchers at the Center for Retirement Research (CRR) at Boston College, the employers in the sample added 215 mutual funds and dropped 45 funds. Many of the additions seemed to be motivated by a desire to add a new type of fund, as more than half were selected from an investment category unrepresented in the plan at the time of the addition.

The analysis looked at the performance of the added and dropped funds for three years before the change was made and for three years after. Newly added funds outperformed randomly selected funds before the change. However, this performance bonus essentially disappeared after the fund changes were made, as the added funds did worse, while the dropped funds did better. 

The research also found that, like their employers, 401(k) plan participants tend to chase returns— transferring assets into higher-performing funds rather than rebalancing to restore their original asset allocations—and that their investments’ performance is no better than if the assets had been allocated evenly among the original funds. —Rebecca Moore 

Opportunity ‘Rolls’

Annual IRA rollovers to surpass $450b by 2017 

Annual individual retirement account (IRA) rollover contributions are expected to reach $450 billion in 2017, according to research from Boston-based global analytics firm Cerulli Associates, entitled “Evolution of the Retirement Investor 2012: Understanding 401(k) Participant Dynamics, and Trends in Rollover and Retirement Income.”

Rollover opportunities are increasing as more and more Baby Boomers reach retirement age, said Alessandra Hobler, senior analyst at Cerulli. “Rollovers into individual retirement plans from defined contribution [DC] plans were at $315.7 billion as of year-end 2012,
and we expect that number to reach $450 billion in 2017,” she said.

Some highlights of the study are: 

• Assets in 401(k) plans totaled $3.1 trillion in 2011, representing a significant opportunity for asset managers and other providers;
• In the majority of cases, the rollover goes to an existing relationship. Providers should be less focused on the current opportunity and try to project the benefits of a long-term relationship; and
• IRA assets reached nearly $5 trillion by the end of 2011, and rollover contributions were more than $300 billion. Both of these totals will increase over the next five years as more Baby Boomers retire. 

“The assets in employer-sponsored DC plans need to meet income needs for these individuals,” Hobler said. “Providers need to position themselves as the best choice for retirees who will rely on these assets alone. In many cases, a rollover presents an opportunity for asset managers to capture additional assets.”

The growing opportunity in IRA rollovers should be a key component of financial services firms’ strategies over the next five years, Cerulli believes. Engaging plan participants has been a challenge for many years. Providers seeking rollover assets need to target their firm’s investor profile. One-size-fits-all messaging may result in missed opportunities. —Jill Cornfield 

Advisers Focus on Plan Design

Better outcomes give advisers a competitive edge

Advisers are spending more time than ever on their actual plan design, George Castineiras, senior vice president of Total Retirement Solutions at Prudential Retirement, told PLANADVISER, adding that the adviser community has become “razor sharp” on the outcome value proposition.

Advisers’ focus on plan design could be one reason both automatic enrollment and automatic escalation seem to be on the uptick, Castineiras said. Prudential’s retirement plans saw an increase in auto-enrollment (from 20% in the fourth quarter of 2011 to 31% in the same quarter a year later), as well as a significant increase in plans using auto-escalation (9% in the fourth quarter of 2011 and 17% in the same quarter 2012).

Another reason for an increase in auto-enrollment and escalation could be “social responsibility”—as Castineiras described the increase in saving following the recession—similar to the financial discipline that occurred after the Great Depression. “Part of what happened in 2008 became a catalyst for [saving],” he said.

During the recession, younger generations witnessed Baby Boomers struggling to handle retirement needs, which prompted them to take a more proactive role in their financial futures, he said.

The industry as a whole has also realized that the defined contribution (DC) space needs to be modeled after defined benefit (DB) plans, which has prompted more auto-options. “Everyone’s watching the auto-path taking hold,” Castineiras said.

Throughout the industry, auto-enrollment seems to be changing more substantially than auto-escalation, which still holds a rate of about 1% a year across the industry, according to Castineiras.

In regards to auto-enrollment, the average deferral rate has held fairly steady since the 2006 Pension Protection Act (PPA) was passed—a 2% to 4% deferral rate, on average. But momentum is starting at a 5% or greater deferral rate, and Prudential encourages participants to reach a rate of at least 10%, Castineiras said. —Corie Russell 

Uninformed

Younger investors admit to being handicapped on finance

A LIMRA study found that Generation X and Y consumers who consult financial professionals to make investment decisions are more likely to be very knowledgeable about investments and financial products than those in that age group who do not (14% vs. 6%). Yet, only one in five works with a financial professional.

Among Gen X and Gen Y consumers with access to a defined contribution (DC) plan through their employer, those who have never made contributions are more likely to feel less knowledgeable about investments and financial products than those currently contributing to their DC plan.

On average, Gen X consumers have contributed to their current employer’s DC plan for nine years, accumulating nearly $70,000. The median deferral rate is 6% for all Gen X consumers, although slightly higher for men (7%). Given that Gen X consumers have passed age 30, their deferral rates are typically recommended to be above 10%; however, less than half (43%) contribute 8% or more.

On average, Gen Y consumers have contributed to their current employer’s DC plan for four years, accumulating slightly less than $26,000. The median deferral rate for Gen Y consumers is also 6%, with one in five Gen Y consumers contributing 3% or less to their current employer’s DC plan.

“There’s a lot of attention on the [78 million] Baby Boomers, but there are nearly 116 million Americans ages 20 to 47, and as an industry we need to help these Americans plan and save for retirement,” says Cecilia Shiner, senior analyst for LIMRA Retirement Research. 

The study is based on a survey conducted in May 2012 that polled 5,296 Americans ages 20 to 84. Of those surveyed, 884 respondents were Gen X and 720 were Gen Y. Additional results were based on LIMRA analysis of the U.S. Census Bureau’s Current Population Survey – March 2012 Annual Social and Economic (ASEC) Supplement and the Federal Reserve Board’s 2010 Survey of Consumer Finances. —Rebecca Moore 

Americans Want New Pensions

Pensions are viewed as providing security

Americans are highly supportive of pensions and see these plans as a way to improve retirement readiness, a survey found.

Eighty-three percent of Americans report favorable views of pensions, and 82% say those with pensions are more likely to have a secure retirement, according to “Pensions and Retirement Security 2013: A Roadmap for Policy Makers,” a research report issued by the National Institute on Retirement Security (NIRS). In addition, 84% of survey respondents say all Americans should have access to a pension in order to be self-sufficient in retirement.

Support was strong from both men and women (83% and 82%, respectively). Pensions may also play a part in choosing an employer—when considering a new job, Americans report being nearly twice as likely to pick an employer with a pension plan than one with a 401(k) plan.

Eighty-seven percent of Americans polled contend that policymakers fail to understand how hard it is to save for retirement. Millennials are highly dissatisfied, at 94%. Three-fourths of Americans say a new type of pension plan that was described in the survey is a good idea. More than 90% would favor a new pension plan that is available to all Americans, is portable from job to job and provides a monthly check throughout retirement for those who contribute.

Nearly three-quarters of respondents (73%) support public employee pensions because public employees contribute to their pension from every paycheck. The survey also found that a majority of Americans (85%) continue to report concern about their retirement prospects, with more than half (55%) very concerned. Concern is higher for women than men (90% and 80%, respectively), and concern is high consistently across generational lines.

Eighty-seven percent of respondents say the increasing number of Baby Boomers who retire without pensions and/or adequate savings puts a strain on families and the economy. Sixty-seven percent say it is a mistake to cut government spending in such a way as to reduce Social Security benefits for current retirees. —Rebecca Moore 

401(k) Plan Fees Declining

Mid-size plan fees down slightly, to 1.46%

The average total plan cost for a small retirement plan—i.e., serving 50 participants and holding $2.5 million in assets—declined from 1.47% to 1.46% over the past year, while the average total plan cost for a large retirement plan—i.e., with 1,000 participants and $50 million in assets—declined from 1.08% to 1.03% during that same period, according to the 13th edition of “401k Averages Book.”

The study shows that the small-plan average investment expense declined—from 1.38% to 1.37%—as did the large-plan average investment expense—from 1.05% to 1.00%. The average total expense, for a small plan is 1.46%, but the range between the high and low total plan expenses is 0.38% to 1.97%.

“401(k) fees have been trending down over the years, but the Department of Labor [DOL]’s fee disclosure regulations helped bring a great deal of attention to 401(k) plan fees,” says Joseph Valletta, co-author of the book. “More plan sponsors and their advisers recognize the importance of plan fees and the wide range of fees in the marketplace.”

“Since target-date fund [TDF] usage continues to grow in 401(k) plans, we thought it was important to calculate the average cost of [TDFs] available within 401(k) offerings,” says the other co-author, David Huntley. 

The study found that the average TDF expense for a large plan is 0.98%, while the balanced fund average is 1.12%. The average TDF expense for a small plan is 1.37%, while the balanced fund average is 1.45%. —PA