2017 RPAY – Cate Brunton Luc Group

PLANADVISER: What is your mission statement?

Cate Brunton Luc Group at Merrill Lynch:
Our mission is to improve the financial outcomes of our retirement plan clients by incorporating advice tailored to their unique needs, delivered with integrity, transparency and an unwavering commitment to putting their interest ahead of our own.

PA: How is your team/process/structure unique? How has it evolved?

The most unique part of our process is how we manage the removal and replacement of investment managers within our defined contribution investment menus. Our investment process has evolved significantly since 2011, and when we back-tested our results, the changes we implemented have provided significant value to our participants.

At the end of 2011, we were evaluating manager performance, similar to our peers, by focusing primarily on three- and five-year risk and return performance metrics. Specifically, one manager, who was named international fund manager of the year by Morningstar in 2010, Janus Overseas, caught our attention. What we witnessed was a rush of assets into the fund at the beginning of 2011, only to have the fund experience losses that were similar to losses experienced in 2008.

What proceeded the following years was significant underperformance for anyone who kept assets with that manager. This experience reinforced the question of why anyone would focus on historical performance when selecting a replacement manager when every performance disclosure ends with “past performance is no guarantee of future results”.

In studying manager performance and even taking into account simple math, the probability that any committee can consistently select a fund that is in the top half each year for five years is just over 3%, (only 12.5% for three consecutive years).

Given those odds, we developed a process which focuses on underlying fund structure and stock selection methodology. In short, selecting managers which have a higher number of underlying holdings, which helps eliminate the potential of an abstract event which managers are ill-prepared to manage.

In our opinion, the biggest change is the understanding of how managers made decisions to sell a position which is losing value for the portfolio.

We look for a structured process which takes into account the costs of being wrong and the ability to limit losses through a disciplined sell strategy. By focusing on the underlying structure of the fund, disciplined security selection and spending little if any time on past performance, we have been able to guide committees structure their investment lineup to benefit participants rather than continually making changes that take into account historical data in driving the investment decision.

PA: What areas of service are customized for each client? What are the same across your book?

Our service approach is customized to each client based on the different benefit offerings they offer holistically, as well as the current success metrics of their plan. However, given the stringent regulatory and fiduciary environment we find ourselves in, we do have a few processes which must be standard across our client base to meet the Fiduciary standard. These include the annual fee benchmarking for investment, recordkeeping and consulting fees, as well as to ensure committee charters and investment policy statements are current and annually validated.

One area where we have an annual process in place that is customized to each client and has yielded significant benefits is our evaluation of their Qualified Default Investment Offering offering, most notably their target date asset class. Given all of our clients utilize some form of target date fund and have it as their QDIA, we perform a thorough analysis of the entire marketplace annually and customize our recommendation to each client’s unique plan characteristics.

As we know, each off-the-shelf target date is unique in its approach to managing assets and glide path, which allows us to follow a process of understanding how each participant at different organizations is using the plan, and which target date is the best fit.

We perform an analysis on how participants are using the plan; what their savings rate is, how old they are, equity/fixed income allocation and many other variables. One variable we added a few years back was the inclusion of their pension plan in our evaluation metrics. While most of our clients have a pension plan, we found that few advisers

utilize the information available to help them determine the most appropriate glide path and underlying managers for a target date fund when a pension plan is offered.

What we have found is for plans which have an active pension plan, this is often the place which participants place the greatest emphasis on and view their 401(k) plan as additional benefit, but not their core retirement focus. In discussions with participants who fall into this category, we have discovered that, by and large, they seek predictable returns with a low risk profile and prefer to limit downside risk when markets decline. This has pushed us to consider a more conservative glide path for many of these participants than a typical ‘through’ retirement target date fund offers.

PA: What do you need to be successful? From your team? From your clients?

To be successful in today’s highly regulated environment, we need a platform that values the agnostic nature of our guidance, a firm that is investing in the business, access to technology that can be used to support our clients, customizable reporting, and an ongoing commitment to placing our client’s best interest ahead of our own.

To be successful as a team, we have to provide customer service that is unrivaled in our industry, act with integrity 100% of the time, respect the trust that has been placed in us, remain committed to educating ourselves to stay relevant, and adding staff to maintain service levels in a high-growth business.

To be successful, we need clients who value advice, are transparent with us, and make decisions that are in the best interest of their participants.

PA: What do you consider the most significant challenge facing retirement plan participants? Facing retirement plan sponsors? Facing retirement plan advisers?

CBLG: The most significant challenge facing retirement plan participants is needing to do more with less. By this we mean, the income participants have is a fixed bucket, but organizations are changing the way they pay for benefits. Healthcare is by far and away the greatest challenge facing participants, and because of the changes taking place, this will have the largest impact on retirement readiness.

According to the OECD, almost 40% of Americans age 16-65 have a low numeracy, which translates to they struggle with understanding even simple math. With the advent of high-deductible health plans, participants initially see a lower cost to their premiums and immediately sign up, oftentimes ignoring the benefit of an HSA or thinking to increase their retirement savings by the difference.

What’s worse is few if any are able to calculate the probability of a major health event when they will need to have access to a large sum of cash to pay the bill. What we have started to see is an increase in loans or withdrawals from retirement funds to help pay these medical expenses.

The participants who are positioned the best are the ones who work for organizations which are able to communicate the health and retirement plan in a unified message. This holistic messaging shows participants the value of where their money can go and which plans work the best for each participant’s specific circumstances. This is an area where we have deployed resources and significantly enhanced the understanding of the holistic benefit offering, which, in turn, has led to fewer surprises down the road.

The most significant challenge facing plan sponsors is the uncertain implementation of the DOL fiduciary standard. It seems likely that some sort of implementation of the rule will go into effect requiring additional time and resources to be devoted towards retirement plans. In our opinion, most plan sponsors will need to begin the evaluation of how they are going to offer a plan structure that will benefit not only their current employees, but also their retirees. It is highly likely that with the implementation of the Fiduciary standard, IRA rollovers will slow dramatically and a greater share of assets will remain inside the 401(k) plan post retirement.

This assumption places a higher burden on the plan sponsor. We envision plan sponsors being faced with making decisions that will impact how frequently distributions can be made from the plan, offering institutional priced annuities that provide predictable income amounts, and a greater emphasis on the decumulation phase for retirees as opposed to investment menus offered today that are geared toward the accumulation phase of an employee’s career.

This represents a significant shift in how retirement plan investment menus are built, and many plan sponsors as well as recordkeepers seem to be ill-prepared to manage this. We envision a two-track investment menu in the future  — one for participants deferring money into the plan, and one for participants who are in retirement taking distributions.

PA: Describe any particularly initiatives you have led with your customer base in the past 12 months (investment or education or plan design or communication).

CBLG: Within the last 12 months we have begun a campaign with a number of our clients around communication of the plan and the value of the benefits their participants receive. As the economic cycle seems to be maturing in the US, we are working with our plan sponsors to develop a better methodology of plan design. What we have found working with new clients is the majority have not evaluated why they are matching a set percentage  or what they are receiving for this expense. Our goal is to use this expense and get the most benefit, not only for the organization, but also for participants.

If the goal is a specified target replacement ratio for each participant at retirement, then the expense of company contributions should be designed in a way which help each participant, not the average. Most reporting is done to show what the ‘average’ result will be; this is not the same as the expected. The average is the middle, while the expected could have populations skewed towards the better or worse outcome.

The campaigns we are currently undertaking is to divide the benefit which participants are receiving from the company contribution into three categories: newly hired, mid-career and near retirement. What we are not doing is asking plan sponsors to direct more funds to the retirement plan, instead we are working with them to optimize the match.

Once an optimal plan structure is devised, we are then able to begin the process of comparing and contrasting the new benefit offering to that of their competitors. With employment levels reaching recent highs, we are starting to see employees begin to be enticed to leave their current employer for an opportunity across the street for slightly more pay. What we are trying to accomplish with the help of the human resources team is to quantify total compensation an employee receives. From a behavioral perspective, this acts as an anchor for which the employee is able to compare their ‘total income’ against what other employers may be offering.

What we know is most employees view the benefit of a retirement plan in the abstract and have difficulty placing a value on it. It is easier for all of us to detect differences rather an absolute. This process had allowed organizations to demonstrate the value they are providing their workforce and also allowing them to maximize the expense of providing a retirement plan to participants. 

PA: As a retirement plan adviser, what do you take the most pride in?

Positively impacting our participants’ financial livelihoods in retirement by providing them with an income stream that meets their retirement lifestyle objective. We achieve this by staying abreast of a constantly changing environment (regulatory and legislative) to provide our plan sponsors with guidance to positively impact their retirement plan constituents.

We pride ourselves on our strong desire to stay ahead of our peers by challenging the status quo, being early adopters to automatic initiatives, seeking out educational opportunities to improve our team, engaging outside experts to provide our team training, and bringing innovative ideas to our committees to positively impact their participant communication efforts.

PA: What is your most significant area of needed improvement?

Streamlining messaging to our clients in an environment where they are being bombarded by the media due to legislative uncertainty, shifting regulatory environment, and the litigious nature of our business.





Plan assets under advisement: $10 billion

Median plan size (in assets): $200 million

Total plans under administration: 38

Total participants served: 76,250