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Ownership in 401(k) Plans Grows 

Retirement plan participation dips, but 401(k) involvement rises.

According to a report by the Employee Benefit Research Institute (EBRI), while 401(k) plan ownership is rising, ownership of individual retirement accounts (IRAs) is sliding.

In an analysis of the period from 1992 to 2010, EBRI found the share of American families with a member in any em­ployment-based retirement plan from a current employer increased steadily, from 39% in 1992 to 41% in 2007, before declining to 38% in 2010.

Ownership of 401(k)-type plans among families participating in a retirement plan more than doubled—from 32% in 1992 to 79.5% in 2007—and increased again in 2010 to 82%. But the percentage of families owning an individual retirement account (IRA) or Keogh retirement plan (for the self-employed) declined, from 31% in 2007 to 28% in 2010. In addition, the percentage of families with a retirement plan from a current employer, a previous employer’s defined, contribution (DC) plan or an IRA/Keogh declined, from 66% in 2007 to 64% in 2010.

As in the past, EBRI found that retirement plan assets account for a growing percentage of most Americans’ financial wealth, not including the value of their home. The median percentage of families’ total financial assets contributed by DC plan assets and/or IRA/Keogh assets (assuming the family had any) increased from 2007 to 2010 and accounted for a clear majority of these assets.

In fact, DC plan balances accounted for 58% of families’ total financial assets in 2007, and that share grew to 61% in 2010. DC and/or IRA/Keogh balances increased their share as well, from 64% of total family financial assets in 2007 to 66% in 2010.

However, EBRI said, the most recent data, along with other EBRI research, indicate that few people are likely to be able to afford a comfortable retirement.

“Americans lost a tremendous amount of wealth between 2007 and 2010, and the percentage of families that participated in an employment-based retirement plan and/or owned an IRA decreased, as well,” said Craig Copeland, EBRI senior research associate and author of the report.

However, he added, the percentage of family heads eligible to participate in a DC plan and who actually did so remained virtually unchanged during this time. Therefore, Copeland said, despite all the bad news that resulted from this period, one positive factor should be noted: “Those eligible to participate in a retirement plan continued to participate, which may help change the likelihood of a lower retirement standard for many Americans.” —Jill Cornfield 

Business Is Good, But The Economy … Not So Much 

Most advisers believe the American dream is alive but Millennials will struggle.

In the fall, the mood of independent registered investment advisers (RIAs) was a study in big-picture optimism with a strong shot of short-term pessimism, according to the 12th semiannual “Independent Advisor Outlook Study” from Charles Schwab Advisor Services.

Independent advisers were very bullish about their own businesses, with many hiring, the study found. At the same time, they foresaw a range of challenges facing their clients, particularly in the near- to midterm, and, year-over-year, their outlook for the economy and markets overall was trending negative.

For the first time, the study asked advisers for their perspectives on “the American dream,” recognizing this group’s unique vantage point as business owners and professionals who have contact with individual investors. The result: Advisers believe the American dream is very much alive, though they say it will be harder for Millennials to achieve the same economic status as their parents.

Investors are faced with a complicated and uncertain economic and investment environment, observed Bernie Clark, executive vice president and head of Schwab Advisor Services. “It is a veritable mixed bag of risk and opportunity in which only one thing is very clear—the critical need for trusted advice,” Clark said.

Advisers are optimistic about their own businesses over the next four years: Eight in 10 are bullish regarding assets under management and firm profitability. More than one-third (37%) of advisers said they have hired new staff, especially in investment management (48%), client service (47%), operations support (47%) and business development (32%).

The new jobs come on the heels of four years of growth for most advisers: 75% said their assets under management have grown over the past four years, and more than half (55%) reported improved profitability.

Among the industry issues with a potential impact on business, developments that advisers are following closely include regulatory changes (49%), changing client demographics (27%), succession planning (25%) and the costs of running an adviser firm (24%).

Advisers are also optimistic about the American dream. The majority (81%) believe it is still alive but say the dream is different than it was a generation ago. Four in 10 are bullish about the American dream over the next four years, but, at the same time, they are cognizant of potentially serious challenges.

Close to two-thirds (63%) of advisers say it will be difficult to achieve clients’ goals, and they point to the federal debt (65%), high unemployment (61%), the cost of college education (60%) and health care costs (59%) as having the most negative impact on the ability to achieve the American dream.

“Advisers have a prism of reference that includes both the individual client’s personal and financial picture and the adviser’s own experience as a business owner in this challenging economic environment,” Clark said.

Adviser optimism regarding the markets is down 12 percentage points since the beginning of the year and is in line with levels seen in the lead-up to the 2008 elections. Just 55% of advisers predict the performance of the S&P 500 will increase in the next six months, despite the fact that the S&P 500 is approaching levels not seen since 2007.

More than half the advisers surveyed think the U.S. economy and the state of the capital markets have worsened in the past four years, and the rising economic optimism reflected in the “Independent Advisor Outlook Study” released in early spring has waned.

Highlights of the study include the following: 34% of advisers are bullish on the market, down from 45% in January; advisers who think unemployment will increase have almost doubled—33% versus 18%; more advisers think inflation will increase—50% versus 44%; and more advisers are concerned about a double-dip recession—23% versus 14%.

In terms of the impact on their investment choices, advisers are pulling back from U.S. large- and small-cap equities and increasing allocations to cash and real assets. Thirty-two percent of advisers said they are likely to invest more in U.S. large cap, a drop of nine percentage points from earlier this year. A similar drop was seen for U.S. small cap (from 23% to 18%).

Exchange-traded funds (ETFs) are still the investment vehicle most advisers said they will probably invest more in over the next six months—advisers registered almost double or more the level of interest in ETFs compared with all other investment vehicles.

The “Independent Advisor Outlook Study,” conducted by Koski Research, has a 3.3% margin of error. The study collected opinions of more than 830 RIAs, representing $183 billion in assets under management, and was fielded between August 21 and 31. —Jill Cornfield 

Self-Correct 

Drinker Biddle & Reath asks DOL for relief for fee disclosure errors.

Defined contribution (DC) plan advisers and recordkeepers could very well make unintended mistakes when trying to provide sponsors with all of the detailed information required by Rule 408(b)(2).

This is why Drinker Biddle & Reath sent a letter to Phyllis Borzi, assistant secretary of labor at the Department of Labor (DOL) Employee Benefits Security Administration (EBSA), laying out the foundation for a voluntary correction program for 408(b)(2) failures.

“We recognize that the regulation contains a remedial provision for certain disclosure errors,” Drinker Biddle said in the letter. But a “significant number” of advisers and service providers are bound to make innocent, seemingly innocuous errors that will result in “the serious consequences of engaging in a prohibited transaction.”

Asked by PLANADVISER what kinds of mistakes advisers and service providers might make, Fred Reish, partner in Drinker Biddle & Reath’s Employee Benefits and Compensation Practice Group, said a simple computer coding error could omit disclosures from all of their Employee Retirement Income Security Act (ERISA) plan clients. In addition, there may be advisers who serve only one or two DC plans, insurance brokers and small broker/dealers who might be unaware of the rules in the first place.

An EBSA spokesperson confirmed that the agency has received Drinker Biddle’s request for a 408(b)(2) voluntary correction program but would only say that “the agency welcomes suggestions on ways to improve its programs.”

Reish said: “Clients have talked to us about correcting their mistakes” and are concerned about repercussions from failing to fully comply with the rule. “While the regulation does have a 30-day correction period for good faith errors or omissions,” he said, “the provision was drafted very narrowly and would not apply to most of the circumstances raised by our clients.” Reish also noted that EBSA and the Internal Revenue Service (IRS) offer remedial programs for other regulations.

Drinker Biddle said a correction program would “promote compliance by providing an incentive for service providers to correct their errors with reduced penalties, while simultaneously allowing the regulatory agencies to leverage their resources to pursue intentional violations, [thereby]increasing overall compliance and enforcement results.” The end result, the law firm told EBSA, would be better protection for plan participants.

Here is how it would work. After a covered service provider (CSP) discovered an error in its fee disclosure report to a plan sponsor—and had corrected the error—it would be allowed to anonymously submit an application developed by EBSA, along with documentation of the correction, to overwrite the error. If EBSA approved the steps the CSP had taken to fix its mistake, it would issue the CSP a no-action letter telling it that no further investigation would be necessary and that it would be given relief from penalties.

Asked why he thinks it is important for the program to be conducted anonymously, Reish said: “Until the DOL indicates the amount of the filing fee and the methodology for correction, [which could engender] a more punitive approach, it could discourage service providers from using the program.”

The no-action application would also require a fee, yet to be determined, Reish said. “We think it is important that it be high enough that there be some cost,” Reish said, “but low enough that it encourages service providers to engage in the process.”

Drinker Biddle takes the position in its recommendation letter that a compliance relief program for 408(b)(2) is critical, given that “the regulation is perhaps the most sweeping regulatory change in several decades, requiring service providers in nearly 750,000 plans to review and amend their arrangements and disclosures.” —Lee Barney 

Retirement Plan Deferral Limit Increases for 2013 

Strong Ties 

Social media can enhance relationships.

Advisers can use social media to build more personal relationships with clients, speakers said during the Securities Industry and Financial Markets Association (SIFMA) social media seminar.

Jay Gordon, chartered retirement planning counselor and financial adviser at The Popper Gordon Group at Morgan Stanley Wealth Management, told seminar attendees that, on his LinkedIn profile, he includes a summary of how he can help clients: “It’s a good time to talk with us if: you wish to consolidate scattered retirement accounts from former employers; you administer your company’s 401(k) plan and need help managing your fiduciary responsibilities; [or] your current adviser is not meeting your expectations.”

Gordon also reviews clients’ profiles the day before meeting with them to gauge whether that client’s LinkedIn connections could also benefit from services such as 401(k) rollover.

Betsy Billard, a private wealth adviser at Ameriprise Financial, said she uses Facebook to be notified of clients’ and prospective clients’ job changes. For Billard, Facebook is a great prospecting tool that she said is unique because of its “Like” feature.

Gordon said Facebook gives advisers a way to engage with clients in ways they normally would not because it is more personal. “It makes the relationship quite a bit warmer,” he said.

Billard’s company has no Twitter business page, but she said many clients have found her personal Twitter account. She follows more than 800 people and organizations representing a wide range of her interests—from financial publications to the Yankees—which, she said, provides more personal interaction with clients through discussing shared interests.

Sacha Millstone, senior vice president of investments at Raymond James Financial Inc., said her company started with small social media goals—such as simply tweeting once a week—and expanded from there. “Twitter is one of the most powerful ways to create community that there is,” Millstone said.

Chris Keller, senior vice president and chief information officer at Benjamin F. Edwards Co., said in another seminar panel that the visual impact of YouTube has been extremely successful for his company.

Facebook is the most widely used social media platform, followed closely by LinkedIn and YouTube, George Walper Jr., president of Spectrem Group, said during the SIFMA event. “[YouTube is] a really powerful tool for the investor community, and it’s far more intuitive than a lot of other social media platforms.” Clients also enjoy using YouTube to refer advisers and share comments about their experience with that adviser, he added.

In general, Millstone said, the landscape of client communication is changing, and she welcomes it. “[Social media] is an incredible opportunity to define yourself,” she said.

Despite advisers’ willingness to embrace social media, compliance challenges can hamper its spontaneity. Compliance must review all tweets beforehand. “The whole point of social media is to be immediate,” Billard said. Keller hopes the industry can someday develop a rules engine that allows instantaneous compliance approval of social media posts.

Although compliance challenges exist, Walper said it is more harmful to fail to adopt social media altogether because it can cause businesses to lose or turn away prospective clients. “Social media is something that’s going to be around forever,” he said.

As for the future of social media, seminar panelists agreed that engagement—rather than just pumping out information—is the next wave. Advisers must respond in a timely manner to social media posts and remain at the center of conversations, said Gail Gross, director of Wealth Management brand marketing and affluent segment programs for Bank of America Merrill Lynch. —Corie Russell 

Help Getting Retirement-Ready 

DC plan participants look to employers and plan providers for guidance.

Participants in 401(k) plans prefer more proactive steps to increase their retirement readiness. Specifically, participants would like more analysis, suggested solutions and a better understanding of the tools and guidance offered by their retirement plan provider to help them optimize the use of their retirement plan, according to recent research.

Nearly half of participants feel they are behind schedule in saving for retirement, and three in five wish their employer did more to educate them about their retirement plan, according to the fourth annual “2012 DC Participant Experience Study” by KK & Company and Greenwald & Associates.

Four in five trust the recommendations­ of their plan provider, and the same number reported that they were very interested in learning more about ­retirement planning.

Many participants have false confidence in the effectiveness of their efforts to save for retirement, the study revealed. Of the 54% of respondents who believe their savings for retirement are on schedule or ahead of schedule, half are older than age 35 and have less than $240,000 saved in their defined contribution (DC) account, with 26% having less than $100,000 saved.

The study also found that most participants are extremely or very interested in having their statements include projections of how much they need and will have in their plan at retirement age if they continue their contributions. Three approaches to projections were tested in the survey, and participants favored the one based on a continuation of contribution rates.

“[The American worker is] looking for more insights on how to prepare and manage for retirement rather than understanding the rules and mechanics of their 401(k) plan,” said Mathew Greenwald of Greenwald & Associates.

Information for the study was gathered through 17-minute interviews with 1,018 plan participants, using the Research Now online panel. —Kristen Heinzinger 

Annuity Answers 

Advisers need information about annuities.

Nearly 61% of advisers report annuities are the primary unsolicited product request from clients. That is followed by 59% of advisers citing Roth IRAs (individual retirement accounts), 50% pointing to 529s or other education savings accounts and 46% citing commodities, according to Cerulli Associates.

The interest in annuities is particularly striking given that one-third of households are unaware of them, noted Cerulli in its report “Annuities and Insurance 2012: Evaluating Growth Capacity, Flows and Product Trends.”

More than 50% of advisers expect their clients will ask for a variety of retirement income solutions, including annuities, in the years ahead. However, advisers will need support from insurers and asset managers to understand and explain the intricacies of annuities, Cerulli said. Insurers will need to create annuities based on the increasingly popular fee-based—rather than commission-based—compensation structure, according to Cerulli. Fee-based advisers are also more interested in the cost structure and underlying subaccounts of annuities than they are in living benefits, Cerulli said.

“We’ve seen a tremendous year-over-year increase in the number of times financial advisers receive requests from their clients for annuities—an increase of 15%, in fact,” said Donnie Ether, senior analyst at Cerulli. “The product ranked sixth in 2011. Both the positive and the negative attention annuities have received in the media over the past four years have led to an overall growing awareness. This presents a unique opportunity for insurers and advisers.” —PA 

Auto-Enroll Harbor

Protection for automatic ­enrollment problems.

Industry groups have recommended to the Internal Revenue Service (IRS) a “safe harbor” correction for automatic enrollment failures.

In a comment letter, the American Society of Pension Professionals & Actuaries (ASPPA) and the Council of Independent 401(k) Recordkeepers (CIKR) said they are requesting additional enhancements to the Employee Plans Compliance Resolution System (EPCRS) to encourage companies to include automatic enrollment provisions in their plans. 

Specifically, ASPPA and CIKR recommend that the service modify the safe harbor correction methods under EPCRS to provide that, in the case of a plan with automatic enrollment, if an employee is inadvertently excluded from the plan or his deferral rate is not automatically increased in accordance with the plan’s provisions, there would be an acceptable correction method. This would be: to make a corrective qualified nonelective contribution (QNEC) with respect to any matching contribution failures occurring during the period of exclusion or nonescalated enrollment rate (adjusted for earnings); or to give affected participants who remain employed the opportunity to contribute, out of future compensation, make-up elective deferrals for the amounts not withheld. —Rebecca Moore