In Practice June 20, 2018

PSNC 2018: Participant Advice in an Era of Fiduciary Uncertainty

Participant advice has highly progressed in the latest years, with the introduction of mobile technology and advanced systems, but how will it change under the new fiduciary rule vacate? 

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Given the recent 5th U.S. Circuit Court of Appeals decision to vacate the fiduciary rule, industry professionals on a panel during the second day of the 2018 PLANSPONSOR National Conference (PSNC) reviewed changes plan sponsors should keep an eye on.

Paul Sommerstand, senior Employee Retirement Income Security Act (ERISA) consultant at Blue Prairie Group, warned plan sponsors to stay cognizant towards their recordkeepers’ connection as a fiduciary. “Be aware, as a sponsor, ask recordkeepers where they are being a fiduciary,” he said. “Ask if contracts and agreements will change. That is something to be clear on, as this is a fluid environment.”

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Leah Hill, partner at Shepherd Financial, reiterated this sentiment, emphasizing on the severe implications behind the court’s verdict. “The biggest takeaway for myself is that this is something important, so many assets are at stake,” she said. “It’s not something that is going away or that will be taken lightly. People do care and want these assets and the advice to be taken seriously.”

In response to the court’s decision, the Department of Labor (DOL) issued Field Assistance Bulletin (FAB) 2018-02, announcing a temporary enforcement policy, “defining who is a ‘fiduciary’ under ERISA and the Internal Revenue Code of 1986 (IRC), and the associated prohibited transaction exemptions, including the Best Interest Contract Exemption (BIC Exemption), the Class Exemption for Principal Transactions In Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions Exemption), and certain amended prohibited transaction exemptions (collectively PTEs).”

Because of heightened fears among financial institutions, advisers, and retirement investors, the DOL determined financial institutions must comply with the temporary enforcement policy, until additional guidance is released.

Whereas advisers must be wary of violating prohibited transactions rule, most concerns from plan sponsors depends on the adviser, says Sommerstand. “Most plan sponsors that we’ve partnered with are looking to help the employees,” he said.

According to Sommerstand, qualities plan sponsors search for in advisers include assistance with Social Security, extensive experience in the field, and a passion in helping participants achieve their retirement savings goals. Similar to how plan sponsors need advisers to increase participant savings, advisers assess an employer’s drive towards their workers’ future, mentioned Hill.

“The best part of my experience depends on the plan sponsor,” she said. “When they take to really promote and pass something on site, care for employees, I think workers really resonate with that.”

A subtopic throughout the fiduciary landscape is the role of mobile technology, and its effect compared to one-on-one, personalized advice. In an era of technological advancements, human interface continues to extensively impact society, said Hill. Whereas robo advisers, web features and app updates seem to govern communications, it’s the basic form of engagement—social interaction—that appeals to a participants’ basic needs.  

“We live in an age of technology. As we continue to advance, we’re realizing that we still need each other,” she said. “People still need people and that everyday interaction. Those words and feelings can never be discounted.”

Yet, this doesn’t mean that plan sponsors cannot use technology to their—and their participants—advantage. Live webinars, emails, and even swift website chat messages can help those employees searching for quick and reliable solutions. It’s up to the plan sponsor, then, to implement these features, and utilize its greater good for the participants’ wellbeing.

“Especially for certain demos, this works very well. However, technology is only as good as you use it…” Hill said. “What we would [do], is take our calculators and then print out a one-page report and put it in the hands of workers.”

The Markets June 20, 2018

PSNC 2018: Investment Lineup Design and Construction Can Safeguard Retirement Savings

Panelists discussed numerous investment options that can push additional retirement savings. 

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From collective investment trusts (CITs) and environmental, social and governance (ESG) testing, to tiered arrays and managed accounts, plan sponsors are considering additional strategies to guarantee their participants are retiring with more money.

Session panelists at the PLANSPONSOR National Conference (PSNC) reviewed which of these investments can help plan sponsors in achieving the first steps needed to ultimately accomplish a retirement savings goal. Panelists discussed the impending future for managed accounts, tiered arrays and their separate stages, and the future of ESG investing, especially with Millennial participants.

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As target-date funds (TDFs) have risen in popularity with increased usage, panelists commented on the future behind managed accounts. Known for their extreme customization and personalization features, managed accounts have received mixed criticism for their often-complicated benchmarking strategies, leading plan sponsors to prefer TDFs instead. According to Joe Szalay, director of Defined Contribution Investment Strategy at BlackRock, managed accounts would best benefit older participants contributing to the plan for years. 

When we look at a managed account, participants who have been in a plan for a while and generated a larger balance will benefit most,” he said. “If you look at new members who haven’t contributed, a TDF provides them with the growth they need in a cost effective way.

Stepping away from the subject of managed accounts, panelists discussed retirement tiered investment lineups, a generally new term that amplifies engagement by providing information to targeted participants. The system consists of three tier levels, all connecting specific participants to preferred investments, whether that includes TDFs, core investments, brokerage windows, or mutual fund windows. Tier levels vary with participants, depending if they would rather self-direct or not.

Dan Bruns, vice president of Product Strategy at Morningstar, believes that the system does work, as long as plan sponsors recognize and connect tier levels to participant needs.

“We generally believe the structure of it is very good for the plan sponsors,” he said. “Ask yourself, what tiers are best for your participants? When you’re thinking about your tier structure, it’s important to recognize your primary tier is where all the assets will be. All the rest serve as secondary.”

To develop a second tier, which highlights core investments for participants interested in self-direct investments sans specialized fund choices, Szalay mentioned the idea of investment consolidation. 
“One thing we often see is people are looking at performance when consolidating investments,” he said. “It’s important to look at how the alpha is generated. It is important to break down that return stream to ensure the funds are generating alpha in a way that is true to the asset class.”

In addition, he mentioned adding white labeling options, which reduce costs and complexity, all centering towards participant engagement.

“There’s multiple mediums, it’s all about what drives that participant engagement. Be creative, get people involved,” he said.

Among a list of notable investment funds and accounts—from CITs, TDFs and managed funds—lays the lesser-known fixed income options and ESG strategies. Once widely unfamiliar, both are gaining popularity as industry professionals urge plan sponsors to amplify investment choices.

“You’re seeing menus that only have stable value and core fixed income. That may have been okay 10 to 15 years ago, when plan members were trying to grow,” said Michelle Rappa managing director and retirement client adviser at Neuberger Berman. “Now, you have those participants retiring and you have to think about what you have that you’re offering to them.”

While Jeffrey Kletti, senior vice president and head of investments at Wells Fargo said ESG strategies have seen little implementation in assets and plans, talks of the option has risen significantly since its inception. “There’s more stakeholders asking companies what’s in a portfolio, how we should think about that and what plan investment committee members are thinking about that,” he said.

Rappa echoed that statement, adding how the investment option can appeal to certain demographics—particularly Millennials—due to the high focus and impact towards sustainable efforts. 

“We are having a lot of conversations surrounding ESG. The conversations have risen to really understanding if there is a way for participants to engage more, because you’re offering a fund that lets them think they’re doing well by doing good,” she said.

Away from talk of investment strategies, panelists mentioned how participants just want augmented options and customization in their plans, parallel to the cornucopia of choices and personalization normalized in today’s society.

“People want customization on their cellphones,” said Bruns. “They’re going to want it in their defined contribution (DC) plans as well.”

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