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What effect does a retirement plan adviser have on a plan?
It is difficult to quantify the services of a retirement plan adviser. Is what an adviser offers in the numbers or in the quality of service? Or both? Whatever the case may be, advisers continue to grow their presence in the retirement plan space: According to the 2008 Defined Contribution Survey by PLANADVISER’s sister publication PLANSPONSOR, the number of plans utilizing advisers has increased to 61.2%, an increase from 55.2% the year before. Not surprisingly, advisers are most in use at plans with less than $50 million in assets, though more than half of plans with more than $50 million also report using an adviser.
The value of an adviser is not striking in areas one might expect. Like the data from 2007, the difference in plan performance data is not obvious—but plans with advisers do show some quantifiable differences. The area where the adviser seems to add the most value is in due diligence responsibilities, such as evaluating the plan investments and provider and in providing individualized advice to participants.
Advisers continue to make a small but notable difference in regard to participation rates. Plans with an adviser showed a higher average participation rate (74.7%) than plans without an adviser (72.9%)—not much different from industry norms.
Though the data are not staggering, it appears that plans with an adviser are more diligent about monitoring the plan provider and investments than plans without an adviser. Nearly three-fourths of plans with advisers have a written investment policy statement (IPS), compared with 66.2% of plans without. Plans with advisers also are more likely to monitor investment options on a quarterly basis, with 33.6% of plans with advisers conducting a formal review quarterly, compared with 27.8% of plans without an adviser. Plans with advisers also are better about monitoring the provider; almost a third (31.8%) of plans with advisers say they formally evaluate their defined contribution (DC) provider annually, compared with less than a quarter (23.3%) of plans with no adviser.
Advisers appear to be helping plan sponsors mitigate some of their liability in their investment selections. Plans with advisers are less likely to have employer stock options (7.6%, compared with 11.7% of plans without an adviser), suggesting that advisers might be steering sponsors away from the investment option that continues to drive plaintiffs’ attorneys. Plans without advisers also are more likely to offer self-directed brokerage accounts (17.5%) than those with an adviser (14.5%).
Offering retirement security is another area where fiduciaries feel increasing responsibility. Automatic enrollment rates saw virtually no difference—in fact, plans without advisers show a slightly higher rate of auto-enrolling participants than plans with advisers (29.8% and 29.5%, respectively). Even more surprising, perhaps, is that plans without advisers showed higher rates of automatic deferral increases/contribution acceleration for participants, with 16.2% implementing these features, compared with 12.3% of plans with advisers.
As the regulatory environment also continues to scrutinize retirement plan fees, the data show that advisers are helping sponsors look more closely at costs. Plans with advisers (72.4%) are more likely to review annually costs and fees than are plans without advisers (69.9%). Plans using advisers are slightly less likely than plans without to say they “don’t know" how much the average expense ratio of plan investments is.
Surely the numbers are not as high in some areas as advisers would like, yet the difference between having an adviser and not having an adviser is still visible, albeit inconspicuous. Regardless of performance data, the number of plans using advisers is on the rise and the majority (65.3%) of plan sponsors using advisers say the “adviser delivers excellent value for the price we pay." Advisers must be doing something right.
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| How many participants are in your DC plan? | Adviser | No Adviser | |
| Less than 100 | 36.6% | 31.7% | |
| 100 - 499 | 30.6% | 25.9% | |
| 500 - 999 | 9.5% | 10.8% | |
| 1,000 - 4,999 | 14.7% | 17.0% | |
| 5,000 - 9,999 | 4.1% | 5.7% | |
| 10,000 or more | 4.6% | 8.90% | |
| Does your plan use the services of a financial adviser? | Overall | Micro | Small | Mid | Large |
| Yes | 61.2% | 65.5% | 63.1% | 55.3% | 51.8% |
| No | 38.8% | 34.5% | 36.9% | 44.7% | 48.2% |
| What are the total DC plan assets? | Adviser | No Adviser | |
| Less than $1 million | 11.0% | 10.7% | |
| $1 million-$5 million | 27.7% | 21.4% | |
| $5 million-$50 million | 36.1% | 33.3% | |
| $50 million-$200 million | 12.6% | 16.1% | |
| $200 million-$500 million | 5.7% | 7.4% | |
| More than $500 million | 6.8% | 11.2% | |
| What is the adviser's fee arrangement? (check all that apply) | Overall | Micro | Small | Mid | Large |
| % of plan assets (bps) | 51.9% | 58.2% | 58.3% | 38.3% | 29.5% |
| Per participant | 10.3% | 14.6% | 8.0% | 2.9% | 11.4% |
| Project-based | 6.2% | 4.0% | 4.4% | 9.1% | 14.3% |
| Monthly/annual retainer | 24.3% | 14.6% | 20.0% | 43.8% | 44.8% |
| Performance: investments | 4.1% | 4.9% | 4.7% | 2.3% | 1.6% |
| Performance: participation | 1.4% | 1.9% | 1.0% | 1.0% | 1.6% |
| Other | 9.1% | 9.5% | 9.7% | 8.1% | 7.6% |
| Do you believe you are receiving good value for the products and services from the adviser? | Overall | Micro | Small | Mid | Large |
| Excellent value for the price we pay | 65.3% | 63.9% | 67.3% | 68.3% | 60.7% |
| Good value, but there is room for improvement | 28.9% | 27.6% | 28.6% | 28.3% | 34.6% |
| Only the minimum product/service levels as stated in the contract | 4.3% | 5.6% | 3.3% | 3.1% | 4.7% |
| Adviser does not add value | 1.50% | 3.0% | 0.8% | 0.3% | 0.0% |
| DC Plan Participation Rate | Adviser | No Adviser |
| Average | 74.7% | 72.9% |
| Median | 80.0% | 78.0% |
| Please rate your DC provider's participant services | ||
| 1=Poor; 7=Excellent | Adviser | No Adviser |
| Participant communication materials | 5.97 | 5.87 |
| Overall participant education program | 5.75 | 5.63 |
| Clarity of participant statements | 6.10 | 6.03 |
| Enrollment assistance | 5.97 | 5.90 |
| Focus on participant asset allocation | 5.80 | 5.68 |
| Accuracy of participant statements | 6.44 | 6.44 |
| Timeliness of participant reporting | 6.31 | 6.28 |
| Turnaround time—loans/withdrawals | 6.35 | 6.31 |
| Internet services for participants | 6.27 | 6.21 |
| Participant call center | 6.00 | 5.91 |
| Range of investment options | 6.29 | 6.18 |
| Retiree services/payments | 6.08 | 6.02 |
| Fees for participant services | 5.63 | 5.59 |
| How often do you formally evaluate your DC provider? | Adviser | No Adviser |
| Annually | 31.8% | 23.3% |
| Every 1 to <2 years | 13.5% | 11.6% |
| Every 2 to <3 years | 16.2% | 15.6% |
| Every 3 to <5 years | 22.3% | 25.1% |
| Every 5+ years | 9.3% | 13.5% |
| Never | 6.9% | 10.9% |
| Employees eligible to participate in the plan: | Adviser | No Adviser |
| Immediately upon hire | 30.1% | 37.7% |
| Within 3 months | 26.3% | 24.3% |
| After 4 to 6 months | 11.4% | 9.8% |
| After more than 6 months | 32.3% | 28.2% |
| Never | 6.9% | 10.9% |
| Adviser | No Adviser |
| 29.5% | 29.8% |
| 70.5% | 70.2% |
| Automatic enrollment implemented for: | Adviser | No Adviser |
| New employees only | 58.7% | 62.4% |
| All employees | 41.3% | 37.6% |
| What was the primary reason that your organization implemented automatic enrollment? | Adviser | No Adviser |
| Enrollment meetings and other education/communication methods were not successful in getting employees to participate. | 5.5% | 4.9% |
| Our organization wanted to be more proactive in helping employees save. | 56.7% | 60.1% |
| We needed more participation from non-highly compensated employees in order to pass discrimination tests. | 16.1% | 13.6% |
| The Pension Protection Act made the automatic enrollment feature more attractive to our organization. | 12.6% | 14.4% |
| Other reason. | 9.1% | 7.0% |
| Default investments for automatic enrollment | Adviser | No Adviser |
| Stable value fund/GIC | 8.8% | 8.9% |
| Target-date fund | 43.3% | 47.8% |
| Risk-based lifecycle fund | 13.9% | 14.3% |
| Company stock | 0.1% | 0.2% |
| Balanced fund | 15.1% | 16.8% |
| Managed account | 6.2% | 3.3% |
| Money market fund | 6.3% | 4.2% |
| Other (please specify) | 6.3% | 4.6% |
| Implemented auto-deferral contribution acceleration | Adviser | No Adviser | |
| Yes | 12.3% | 16.2% | |
| No | 87.7% | 83.8% |
| Loan/hardship withdrawal provisions available | Adviser | No Adviser |
| Yes (loan provisions) | 77.8% | 79.1% |
| Yes (hardship withdrawal provision) | 73.7% | 75.7% |
| No | 7.0% | 6.7% |
| Plan participants with outstanding loans | Adviser | No Adviser |
| Average | 11.9% | 12.7% |
| Median | 10% | 10% |
| Formally review the investment options | Adviser | No Adviser |
| Quarterly | 33.6% | 27.8% |
| Twice a year | 16.2% | 16.1% |
| Annually | 36.7% | 38.5% |
| Every 1 to 2 years | 5.6% | 5.6% |
| Every 2 to 3 years | 2.4% | 3.2% |
| Every 3+ years | 1.6% | 2.6% |
| Never | 2.2% | 4.5% |
| Other | 1.6% | 1.7% |
| Types of investment options offered in your plan | Adviser | No Adviser |
| Employer stock | 7.6% | 11.7% |
| Self-directed brokerage | 14.5% | 17.5% |
| Real estate | 14.4% | 12.3% |
| Alternative investments* | 1.9% | 1.4% |
| Target-date funds | 38.5% | 41.8% |
| Risk-based lifestyle funds | 23.0% | 19.9% |
| Managed accounts | 21.0% | 19.8% |
| ETFs | 1.2% | 0.5% |
| None of the above | 30.6% | 29.2% |
| *Hedge Funds, Venture Capital, Private Equity |
| Participant balances in employer stock | Adviser | No Adviser |
| Average | 17.3% | 23.3% |
| Median | 12.45% | 17.5% |
| Participant balances in asset allocation/lifestyle/lifecycle funds | Adviser | No Adviser |
| Average | 27.1% | 20.7% |
| Median | 18.0% | 14.5% |
| Types of asset allocation/lifestyle/lifecycle funds offered | Adviser | No Adviser |
| Target-date funds from one firm | 43.1% | 49.3% |
| Target-date funds from multiple firms | 22.6% | 20.2% |
| Don't know | 35.4% | 32.2% |
| Is your RK offering the most appropriate target-date fund? | Adviser | No Adviser |
| Yes | 59.7% | 55.5% |
| No | 4.0% | 3.8% |
| Not sure | 36.3% | 40.7% |
| Does your IPS cover target-date funds and underlying funds? | Adviser | No Adviser |
| Yes | 41.0% | 34.3% |
| No | 59.0% | 65.7% |
| If not, are underlying funds held to same IPS standards? | Adviser | No Adviser |
| Yes | 78.0% | 78.2% |
| No | 22.0% | 21.8% |
| Do you evaluate each target-date fund in a series? | Adviser | No Adviser |
| Yes | 61.5% | 59.0% |
| No | 38.5% | 41.0% |
| If so, what if one within the series does not meet IPS standards? | Adviser | No Adviser |
| Reject the entire series | 45.0% | 40.0% |
| Nothing | 55.0% | 60.0% |
| Responsibility in managing retirement income distribution | Adviser | No Adviser |
| Sponsors have responsibility | 25.2% | 22.3% |
| Sponsors do not have responsibility | 74.8% | 77.7% |
| Do you provide a profit-sharing contribution? | Adviser | No Adviser |
| Yes | 42.7% | 37.9% |
| No | 57.3% | 62.1% |
| Do you match the participant's contribution? | Adviser | No Adviser |
| Yes | 72.8% | 74.6% |
| No | 27.2% | 25.4% |
| How much is the approximate maximum match? | Adviser | No Adviser |
| More than 100% of 6% of salary | 5.8% | 4.9% |
| 100% match on 6% of salary | 9.2% | 10.3% |
| Between 51%-99% of 6% of salary | 24.2% | 28.2% |
| 50% match on 6% (effective 3%) | 27.9% | 29.1% |
| Less than 50% of 6% of salary | 32.9% | 27.5% |
| Participants taking full advantage of the match: | Adviser | No Adviser |
| Average | 64.9% | 65.4% |
| Median | 75.0% | 74.5% |
| Participants are 100% vested in the match | Adviser | No Adviser |
| Immediately on enrollment | 28.1% | 31.9% |
| 6 months | 1.0% | 0.7% |
| 1 year | 5.1% | 6.3% |
| 2 years | 3.0% | 3.9% |
| 3 years | 12.1% | 14.3% |
| 4 years | 4.4% | 3.2% |
| 5 years | 25.8% | 24.2% |
| After more than 5 years | 20.5% | 15.5% |
| Financial advice offered to DC participants | Adviser | No Adviser |
| No | 18.3% | 45.0% |
| Yes (financial adviser outside of the plan) | 41.0% | 4.8% |
| Yes (third party—e.g., Financial Engines) | 10.0% | 8.9% |
| Yes (DC provider) | 27.4% | 38.0% |
| Yes (through another source) | 3.4% | 3.3% |
| What is the average expense ratio of plan investments? | Adviser | No Adviser |
| Less than .25% (<25 bps) | 14.2% | 12.1% |
| .25-.50% (25-50 bps) | 18.2% | 20.0% |
| .51-.75% (51-75 bps) | 16.3% | 19.4% |
| .76%-1% (76-100 bps) | 21.1% | 21.2% |
| 1%-1.5% (101-150 bps) | 12.8% | 9.0% |
| 1.6%-2.0% (160-200 bps) | 1.4% | 0.9% |
| 2.1%-2.5% (210-250 bps) | 0.3% | 0.5% |
| More than 2.5% (More than 250 bps) | 0.0% | 0.0% |
| Don't know | 15.7% | 17.1% |
| How often do you formally review costs/fees? | Adviser | No Adviser |
| Annually | 72.4% | 69.9% |
| Every 1 to 2 years | 11.5% | 10.9% |
| Every 2 to 3 years | 6.2% | 5.9% |
| Every 3 to 5 years | 4.7% | 5.3% |
| Every 5+ years | 1.4% | 2.1% |
| Never | 3.8% | 5.8% |
| Do you have an investment committee for the DC plan? | Adviser | No Adviser |
| Yes (internal employees only) | 53.5% | 59.1% |
| Yes (includes non-employees) | 17.7% | 12.8% |
| No investment committee for DC plan | 28.8% | 28.1% |
| Do you have a written IPS for the DC plan? | Adviser | No Adviser |
| Yes | 74.2% | 66.2% |
| No | 25.8% | 33.8% |
| If so, how closely is compliance with the IPS monitored? | Adviser | No Adviser |
| Very vigilant about monitoring compliance with the IPS | 48.8% | 57.0% |
| Somewhat vigilant, but rely on outside vendors (adviser, provider, lawyer, etc.) | 47.2% | 34.9% |
| Not very vigilant; only periodically check IPS compliance | 3.5% | 6.7% |
| Not concerned about IPS compliance | 0.6% | 1.3% |
Methodology
In July and August 2008, approximately 35,136 survey questionnaires were sent to DC plan sponsors from the PLANSPONSOR magazine database, as well as client lists supplied by DC providers; 5.973 total usable responses were received by the close of the survey on September 10, 2008. To get the data for these results, the questionnaires of plans that reported using an adviser were compared with those from plan sponsors that said they do not use an adviser.
Illustration by Bob Staake