Vantage Point

It has become something of a journalistic ritual to look back over a certain period of time—a week, a month, a year—and tease out the top themes or trends. As 2015 draws to a close, it is a time to ask what mattered most in the past 12 months, and how understanding those themes can prepare us for the next 12.

One can safely say 2015 has been a defining time for retirement specialist financial advisers, with no shortage of foreseen and unforeseen disruption. The year brought to conclusion some of the longest-running, and widest-reaching, 401(k) litigations the industry has ever seen, and one hardly needs to mention the pitched battle being fought over the fiduciary rule language that emerged from the Department of Labor (DOL) in April. Beyond the DOL, which issued some late guidance on the topic in November, any number of congressmen, and even the president, directly introduced retirement-related reform this year. 2015 will also be remembered for rigorous technology-based merger and acquisition activity, as well as new initiatives in state-run retirement systems for private-sector workers.

What stories will define 2016? Who can say? What we can do is look closely at another year gone by and try to learn from it. And so, presented below is a selection of seven top trends of 2015, as defined and dissected by some of the best-connected voices in the PLANADVISER network. We hope you will find the discussion helpful as you plan for another exciting year. 

1. How and Why of the DOL’s Proposed Fiduciary Definition
In the first few years after the U.S. subprime-mortgage bubble burst and ushered in a global financial crisis, much regulatory focus was put on the major banks and the systemic interplay of their capital, liquidity and risk.

Of particular importance was the issue of how to “ring-fence risk” within retail and investment banks, says Jim Allen, head of capital markets policy for the CFA Institute, in Charlottesville, Virginia. In the U.S., this played out in heated debate about the Volcker Rule and “too big to fail,” Allen notes.

In more recent years, the regulatory focus has shifted away from banks and toward investment companies and advisers that deal directly with the institutional investors and individual savers who got burned in 2008 and 2009, Allen says. It is a natural progression and helps explain why the heat has been turned up by the DOL and others, in the effort to address conflicts of interest in the advisory industry. He also notes that investors may have recovered much of what they lost during those years, but regulators have yet to finish in terms of addressing systemic risk and strengthening the financial system.

“I’m not at all surprised the DOL fiduciary issue grabbed headlines all year—because, as proposed, the new rule would have a pretty serious impact on the way some advisers do business and sell products,” Allen continues. “Thinking ‘big picture,’ it is key to remember that the pressure our industry is dealing with—from the DOL, the Securities and Exchange Commission [SEC] or otherwise—is best understood in the context of asset managers being recognized as systemically important.”

Along with this deep focus on asset managers and their trustworthiness has come an increasing realization that the relationship between advisers and clients also has real systemic significance, Allen says. The DOL believes advisers are in a position to help ensure financial stability and growth—from the bottom up, as it were—especially those who serve large populations of defined contribution (DC) and defined benefit (DB) plan participants.

Allen says it is still too soon to know what final form the fiduciary rule will take—whether advisers will still be able to sell to Employee Retirement Income Security Act (ERISA)-covered clients on commission, or receive other forms of variable compensation, or whether a given segment of advisers will have to start preparing contracts to conform to the best interest conflict (BIC) exemption—but things should slowly grow clearer as 2016 progresses.

“Personally, I don’t think that all aspects of the DOL rule will be settled in the next year,” he concludes. “It is very hard to see how it’s going to be completely finished and settled by the time the current president’s term runs up, and what will happen after he leaves office is anyone’s guess right now.”

2. The Supreme Court Decision in Tibble v. Edison
As eye-grabbing as the fiduciary rule debate was this year, several other matters garnered nearly equal attention­ among compliance-minded industry practitioners. One of those was the long-awaited Supreme Court decision in Tibble v. Edison.

Like most commentators, Nancy Ross, a partner in Mayer Brown’s litigation and dispute resolution practice in Chicago, believes the decision represented only a modest step in strengthening fiduciaries’ “ongoing duty to monitor,” under ERISA. However, she thinks the court did clearly stipulate that this duty is, in fact, separate and distinct from the fiduciary “duty to exercise prudence” in initially selecting investments for use on a DC plan investment menu.

Strictly speaking, the case was not concluded by the Supreme Court, Ross says, as the high court actually vacated and remanded the specifics in the long-running fee case back to the 9th U.S. Circuit Court of Appeals, which was left with the task of more closely defining what the duty to monitor should look like in this case or others like it. With this in mind, Ross says, “the main impact of Tibble is that it’s a good reminder that plan fiduciaries need to sharpen their pencils and look once again at the processes they’re using—both for selection and monitoring of investments.”

According to Ross, the Tibble opinion does little more than state the obvious. “We have all known that there is a duty to prudently monitor investments under ERISA, and any plan sponsors or advisers serious about their fiduciary duty are already doing this monitoring,” she says.

As explained by Ross’ colleague, Brian Netter, a partner in the firm’s Supreme Court and appellate practice, in Washington, D.C., plan fiduciaries must have a monitoring practice in place for investments, and they must be able to prove that practice is well-established. Beyond this, fiduciaries need to follow such processes, Netter adds, not just have them written down.

Russell Hirschhorn, senior counsel in the ERISA practice center and the labor and employment law department of Proskauer, in New York City, observes that some have interpreted the Tibble decision as paving the way for increased litigation based on the “duty to monitor,” but this is not necessarily the case. Beyond the fact that most plans have already adjusted their practices and procedures to fit a post-Tibble world, Hirschhorn points out that a plaintiff must still be able to plead a plausible claim to win a trial.

“That is, plaintiffs still have to plead enough factual matter to nudge their claims across the line from conceivable to plausible,” Hirschhorn says. This is what the 9th Circuit has to decide in the still-pending elements of the Tibble case: the contours of what a breach of fiduciary duty to monitor should or should not look like.

3. Re-emergence of Market Volatility and Understanding Third-Quarter Declines
Multiple national recordkeeping providers told PLANADVISER they had never seen as many client inquiries as they received during a two-week period in August and September, when U.S. markets were whipsawed by global macroeconomic uncertainty and worries about growth at home. At one point in August, the Standard & Poor’s (S&P) 500 Index was down more than 8.5% for the month, prompting huge numbers of retirement savers to pick up the phone or fire off an email to their plan provider.

Fidelity Investments, for example, managed more than 16 million online inquiries from individual retirement account (IRA) and 401(k) investors from August 23 through 29. In a single day—Monday, August 24—Fidelity received more than 160,000 phone calls from individual retirement account (IRA) and 401(k) investors, for one of its busiest days on record. Customers wanted help on a range of topics, including how to manage investments during periods of volatility, the pitfalls of converting to all cash and the possible reasons behind the recent market drops.

Empower Retirement also reported record plan participant call volumes during the time period, which contributed to the worst median returns for all plan types in a quarter since 2011, according to figures supplied by Wilshire Associates.

Despite the ups and downs, investment managers and strategists overwhelmingly urged participants to remain invested and level-headed. They also reminded advisers that it is critical to consistently underscore the benefits of buy-and-hold investing, even during the boom times, so that when negative fluctuations do occur, the rationale and unyielding approach to long-term investing has been firmly set.

“Volatility is the price you pay for good investment returns,” says Paul Blease, director of the CEO Advisor Institute at OppenheimerFunds in Dallas. “If you don’t want volatility, you will get a low, below-inflation rate of return. I tell my clients that the ticket to high returns is being able to handle volatility.”

Susan Viston, client portfolio manager at Voya Investment Management in New York City, agrees that managing the “psychological missteps” of investing is an important function of advisers in any year—and investors are most susceptible to these missteps during heightened market volatility. “We also know that investors 10 years or less from retirement are probably the most vulnerable to market events,” she adds, “so it is even more important for them to stick with their long-term investing goals based on their risk tolerance and horizon.”

No matter what the state of the mutual fund industry for 2016—boom or bust—investment results are more dependent on investor behavior than on fund performance, Viston concludes. “We can be sure mutual fund investors who hold onto their investments will be more successful than those who try to time the market,” she says , noting that educating investors about long-term investing is critical.

4. In-Plan Guaranteed Retirement Income Options
According to Marcia Wagner, principal of the ERISA-focused Wagner Law Group, in Boston, as we head into 2016, the Obama administration views how people draw down their retirement savings to be equally important to encouraging them to save in the first place.

“Consistent with this view, [the administration] is particularly concerned with the risk that retirees will outlive their assets and wishes to mitigate this risk by motivating plan sponsors and participants to annuitize retirement benefits,” Wagner says.

Choosing an annuity provider is undoubtedly a fiduciary function, governed by ERISA standards of prudence and loyalty, she says. In fact, uncertainty over the scope and duration of the fiduciary duty as it applies to annuity-provider monitoring has left many sponsors reluctant to offer distribution annuities within their plans. Enter Field Assistance Bulletin (FAB) 2015-02, issued in July by the DOL in an attempt to eliminate these qualms.

Importantly, Wagner notes, regulations issued by the DOL in 2008 officially set the standards plan sponsors must follow to maintain safe harbor protections when selecting annuity providers under defined contribution plans. However, in FAB 2015-02, the DOL says it has received many questions about how to reconcile the “time of selection” standard as set out in the safe harbor rule. Wagner explains that the rule embodies the general principle that the prudence of a fiduciary decision is evaluated under ERISA based on the information available at the time the decision is made—and thereafter, following ERISA’s ongoing duty to monitor and review certain fiduciary decisions.

According to FAB 2015-02, she says, “the time of selection” should be taken to mean the time the annuity provider and contract is selected for distribution of benefits to a specific participant or beneficiary—or the time the annuity provider is selected to provide annuities as a distribution option for participants or beneficiaries to choose at future dates.

“The FAB reiterates that a fiduciary is not required to review the appropriateness of its conclusions with respect to an annuity contract once it has been purchased for a specific participant or beneficiary,” Wagner says. “It goes on to note that the periodic review requirement does not mean a fiduciary must review the initial decision to retain an annuity provider every time a participant or beneficiary elects an annuity as a distribution. While regular, periodic reviews would be expected, a more rapid response might be required if annuitants have submitted complaints about untimely payments, or insurance rating agencies have downgraded an annuity provider’s rating.”

Wagner concludes that the FAB “will be helpful to some plan sponsors and their advisers, but more assurance may be needed to convince many others that they would not be exposing themselves to additional liability by offering distribution annuities through their plans.”

5. Ongoing Recordkeeper Consolidation
“Scale is a very important part of the economics that drive this business,” says Kent Callahan, president and CEO of Transamerica’s investments and retirement division, in Atlanta.

Earlier this year, he told PLANADVISER that the announcement of a deal to take on Mercer’s U.S. defined contribution administration business is “all about scale and superior service.” The acquisition will eventually drive the migration of nearly 1 million participants and adds still more momentum to a streak of recordkeeper consolidations.

The deal between Transamerica and Mercer was just one of many announced in 2014 and 2015 that are significantly reshaping the DC plan recordkeeping universe. In another example, OneAmerica and BMO Financial Group, in June, reached an agreement for OneAmerica to acquire BMO’s U.S. retirement services business, BMO Retirement Services—just a year after OneAmerica acquired City National Bank’s retirement services business.

Looking across the recordkeeper landscape, Callahan says major consolidation shows little sign of slowing, heading into 2016. Speaking with PLANADVISER shortly after Transamerica’s parent company, Aegon, announced the agreement with Mercer HR [Human Resources] Services LLC, Callahan said the next three to five years will see merger and acquisition activity in the retirement plan services space “shift from second to fifth gear.”

The motivations for consolidation are complex and varied, Callahan noted, but one common theme is that providers are seeking growth beyond what they feel is currently possible through organic client development. This means absorbing large books of existing business from partners or competitors, and creating preferred provider relationships moving forward. Under the terms of the Transamerica–Mercer deal, for example, Transamerica said it will become “the preferred defined contribution recordkeeping provider for Mercer’s total benefit outsourcing and total retirement outsourcing clients.”

According to Joe Ready, executive vice president of Wells Fargo Institutional Retirement and Trust in Charlotte, North Carolina, another certainty  for the coming years is that, for advisers, close collaboration with recordkeeper partners will remain critical for success. Speaking at the 2015 PLANADVISER National Conference in Orlando, Ready disagreed with the notion that recordkeeping services are becoming commoditized through consolidation; the benefits that accrue from close coordination between adviser and recordkeeper are myriad, he said. “From [producing] greater plan management efficiency to more advanced reporting and faster data updates, a skilled recordkeeper/adviser team can really turn up the heat on plan understanding and performance,” he said.

Ready concluded that one area in particular where advisers and recordkeepers should work more aggressively together is regarding “the cost-vs.-value question”; here, he was referring to ongoing market trends squeezing advisory and recordkeeping pricing closer to unsustainable levels, from a practice management perspective.

“I don’t think either recordkeepers  of advisers have done a good job on navigating and taking charge of this cost-vs.-value question,” Ready observed. “Neither side has successfully enumerated the value of our service deliverables. Instead, we have focused on acquisitions and rolling out shiny new tools and services to try and justify our pricing. It’s unsustainable when you think long term.”

6. ‘Outcomes’ and ‘Financial Wellness’ as Buzzwords
Research is continually emerging that shows a majority of workers believe offering financial wellness is the employer’s responsibility, and most say they would take advantage of general financial education offered in the workplace.

But clearly, in 2016, it will not be just employees who stand to gain from additional instruction on personal finance. A recent survey of human resource professionals commissioned by the Society for Human Resource Management found a vast majority of employers believe financial stress leads to decreased productivity. In another example, workplace financial wellness program provider Financial Finesse independently reported that nearly nine in 10 employees feel at least some level of distracting financial stress while at work, while Pew Research Center says at least four in 10 suffer significant angst over an approaching retirement, usually because they have saved too little.

Travis Freeman, president of Four Seasons Financial Education in St. Louis, suggests that, against this backdrop, financial wellness is now entering “the next phase of a trend that started about 15 years ago.”

“It began with a focus on improving physical health in the work force,” he says. “Then mental health was added. Then employers started to realize other issues people faced were causing ailments and lost productivity.” While he knows of no one vendor that has solved all three dimensions of physical, mental and financial health education in the workplace, more employers are searching out programs that would cover them all for employees, delivering a potentially powerful benefit.

Companies of any size can serve up financial wellness training, but experts agree a one-shot presentation is far from enough. “You can’t just do a lunch-and-learn and call it quits,” Freeman says.

Each well-thought-out program will be different, tailored to a company’s unique employee demographic base and needs, he concludes. A small to midsize firm may be able to create the program in-house or with help from a freelance communications expert or small marketing firm, then kick it off at a common meeting. These meetings could be staffed by “niche vendors,” invited to discuss their specialty such as debt consolidation or credit counseling. Large employers, on the other hand, may have their go-to communications firm spearhead an original financial check-up campaign directed at thousands.

“What’s important to keep in mind with financial wellness is there’s not one way to tackle this,” notes Jennifer Benz, CEO and founder of Jennifer Benz Communications in San Francisco. Like Freeman’s, her firm provides support to employers on health benefit and financial security communication programs. “This isn’t like health benefits or the 401(k),” Benz says. “Financial wellness is a much broader topic, centered on trying to get people to take positive action in all aspects of their financial life. The programs will look radically different at one employer than another.”

7. Developments in Adviser Technology
If any conclusions can be drawn about the expanding use of robo-adviser technologies heading into 2016, it is that automation is not an all-or-nothing game.

Far from it, in fact, says Isabella Fonseca, research director at Celent in New York City, who focuses on wealth management providers. Fonseca recently piloted a research project that analyzed technology use and planned innovation at more than 150 financial services firms; it found some interesting trends taking shape as 2015 draws to a close.

“What we found was that pretty much everyone, all of these firms, from large depository banks to independent registered investment advisers [RIAs], reported having on their near-term agenda a strategic plan to use more technology,” she says. “We also found that firms have a number of options for responding to digital innovation as a whole. They can invest now; they can follow the wait-and-see approach; or they can risk ignoring what’s happening. From our perspective, the latter option is obviously not going to cut it, especially for firms hoping to grow strong into the future.”

Fortunately for advisers who favor traditional advice approaches, Fonseca says, technology can be implemented “selectively but effectively.” In other words, advisers do not have to completely overhaul their practices in order to benefit from new technology tools and to remain competitive.

“Depending on the business, the move toward greater use of client-facing and back-office technology will be expressed in different ways,” Fonseca says. “Different pieces of technology will be prioritized over others for different firms.”

Although their specific responses will differ, Fonseca found most advisory firms are looking for ways to allow staff to spend less time managing and meeting with existing clients in order to focus on business development and product/solution development. Fonseca observes that the most common technology tools being explored and adopted by advisers are customer relationship management systems, “followed by proposal and modeling tools, automated wealth management platforms and mobile access.”

“Looking to the defined contribution world in particular, as investor interest in robo-advising soars, advisers must consider the role customer relationship management technologies can play in streamlining repeatable functions, such as portfolio rebalancing or retirement income projections,” Fonseca says. “Otherwise they’ll risk being left behind by competitors able to achieve greater scale and deeper services with less required manpower.”

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