Big Picture Thinking

At the recent PLANADVISER National Conference, Alison Cooke Mintzer, editor-in-chief of PLANADVISER, hosted a roundtable conversation with Elaine Sarsynski, executive vice president, MassMutual’s Retirement Services Division, and chairman, MassMutual International LLC; Tom Skrobe, the head of BlackRock Defined Contribution (DC) Distribution at BlackRock DC; and John Galateria, managing director and head of Defined Contribution Investment Solutions at J.P. Morgan Asset Management. These retirement industry leaders discussed the retirement plan industry topics that most affect plan advisers and their plan sponsor clients.

Cooke Mintzer: Let’s talk about the role of the adviser to a retirement plan in today’s industry.

Sarsynski: The adviser’s role is really a variety of things. I like to think about two key areas, though, for advisers to focus on: new sales and retention, ensuring that the customers you already have are well-serviced.

So, when thinking about your book of business and ensuring that you have satisfied and loyal customers, it’s important to partner with providers that can support you in relation to all new trends, products, operational excellence and efficiencies that you can possibly get in the industry.

Now, participants need you to help them take action so that they do end up with a relatively strong replacement income in retirement, something around 75% replacement income at age 67. That focus is critical today, and advisers have to focus not only on plan design with the sponsors, but also on participant action plans so that they can retire on their own terms.

If that doesn’t happen, you’re then going to have another conversation with the plan sponsor around whether or not they have the additional funds to support an aging work force. We have done the arithmetic around a work force with a higher percentage of folks age 60-plus, and that can lead to additional expenses: disability insurance, worker’s compensation insurance, those sorts of things.

Cooke Mintzer: How do you see advisers changing their message and their value proposition to go beyond “fees, funds, fiduciary” as they service plans?

Skrobe: Looking at the past 20 years, the role of the adviser has changed and evolved quite dramatically. The value proposition has the core of the three F’s, but you bring so much more to the table when you partner with a plan sponsor and help set the objective for the plan. That’s where it all starts: having a good objective in what you’re trying to accomplish for your plan sponsor clients. Each company has a unique culture, unique participant demographics, and your role is not to be a cookie-cutter provider but to develop a crisp objective so participants can have successful outcomes. Your value proposition is to become a part of that organization and help drive the agenda on behalf of the plan sponsor.

Galateria: When you see the opportunity out there to drive plan design and innovation around outcomes versus pure benchmarking, it’s very significant. We’ve done some research and found that 75% of plan sponsors rate financial health of their participants as highly important, yet just 44% take any kind of action to make sure participants are on track to have an 80% income replacement ratio. That’s a significant disconnect, but a significant opportunity.

The role of the adviser is to drive the dialogue, in some cases to some really uncomfortable places, but the best advisers in the industry are going to have to drive sponsors to these innovative solutions to produce better outcomes.

Sarsynski: It’s very important to set the objectives at the sponsor level. That’s the dialogue you need. At times, people really want to focus on price, a very simplistic design or very serious plan health tools that help to drive the outcome for the participant. It’s important to evaluate that upfront, otherwise you’re really wasting not only your time, but the time of the sponsor as well.

So now what does an adviser do? Now you begin to talk about plan design, auto-enrollment features, deferral increase features, participant action campaigns, and using personas and demographics in the plan to be able to drive behavior. Then, you rerun the outcome tools that are out there in the market to benchmark your progress.

Skrobe: Benchmarking is quite interesting because it means different things to lots of people, and it’s complicated. It all stems from the objective, how you measure that and then what your next step is in helping to solve the problem. How do you get to the root of the issue and then put a plan in place to solve the problem? The key is to define upfront what you’re trying to achieve with your plan sponsor plans.

Cooke Mintzer: How do you have that conversation with a plan sponsor? That is so outcome-oriented, and maybe the plan sponsor hasn’t exactly been thinking that way.

Galateria: Sponsors like to benchmark participant satisfaction and investment performance. Those are very tangible. When you look at outcomes and plan design strategies around outcomes, they’re tougher conversations. Auto-escalation, auto-enrollment, re-enrollment—these things have not been adopted at the level that experts know they have an impact.

So advisers have to break down the motives that impede a sponsor from making that decision. Some of our research also shows that some sponsors see it as more work for them, it’s a greater communications challenge, or participants are going to react badly.

By the way, you really don’t get any pushback from participants when you do a re-enrollment; in fact, 80% of them usually stay in the target-date funds (TDFs), so it’s understanding what’s underlying their reluctance.

Cooke Mintzer: How can advisers address risk management within target-date funds? What do they have to know about it, and how do they talk about that with their clients?

Skrobe: Target-date funds are fascinating—this whole concept of “off-the-shelf,” which is a bad way to describe a very complicated asset-allocation product. Asset allocation is about managing risk and optimizing a portfolio, and having a manager and a process that addresses that is critical but hard to determine. How do you make sure the manager that you’ve hired is going to help you navigate corrections in the marketplace, especially as you get closer to retirement age? The concept of target-date funds is around the risk-managed portfolio, but you need to figure out what the fund will do in periods of stress. Unfortunately, it’s hard to tell until you go through that period, so managers that have been through multiple market cycles will be helpful because they understand how to address those concerns.

The key around risk management is protecting participants as they get closer to retirement and making sure they’re able to consume in retirement, versus having the highest possible replacement income. So when thinking about objective, think about it in two ways: replacement income versus minimizing your loss, but also protecting your ability to spend and what strategies you could have in place to protect that.

Galateria: One-third of sponsors don’t even know the intricacies of their own target-date funds. But understanding risk as it relates to the target-date space is imperative, and it’s a real opportunity. If you work with a committee, they want the best target-date option. Well, how do you define best? Working with committees to get them on the same page in defining which risks they find most critical is really important.

The other thing we all should think about is taking a page from history. We all have looked in our careers at the risk/return continuum. When we looked at stable value, the conversation was about something that’s there 10 years, 20 years from now. In target-date funds, people are re-enrolling and 100% of their assets are in that one product, and it’s a 40-year decision. We should be having the discussion we used to have about stable value about target-date funds.

Sarsynski: How do you engage not only with the sponsor as you’re building out the lineups, but with the participants so they have an understanding of what they’re purchasing? Many times they don’t, so it’s important to be able to communicate at both levels. People may not grasp the performance concepts of “to” and “through.” It’s important to be able to define that, because otherwise you’re going to have very disappointed customers.

And stable value products should not be underestimated. Think through how a stable value, fixed-income, guaranteed investment product can play a meaningful role in your plan.

A custom choice opportunity is important to consider as you try to differentiate yourself in the market. Look for partners to help you build out a fund where you could take a variety of styles—lifecycle funds, age-based funds—and pool them together to have a solution that is customized for your client.

Skrobe: So how do you determine the right target-date fund for your client? The custom phenomenon is alive and well in the larger institutional market, so how do you take some of those concepts down-market?

Advisers play a critical role in this whole equation. Target-date funds are not a “set it and then forget it” strategy, they’re very complex, and advisers must make sure that the appropriate strategy is put in place with the plan sponsor. It is very encouraging to see that they’re becoming more popular with this group.

Cooke Mintzer: How do you go about the “less is more” conversation with regard to picking investments, and how do you still make yourself valuable when you have to pick funds for a smaller menu?

Galateria: You become even more valuable in helping a sponsor trim down their menu. We’ve had numerous conversations with sponsors and advisers across the country about looking at the core menu as three big buckets: stocks, bonds, cash. But you could look at it as four buckets or five buckets, create more of a custom structure around the core menu, which would provide participants instant diversification if they were in any one of those buckets.

When you look at participant behavior and what they’re able to grasp, one behaviorist said the categories have to make sense to the choosers, not to the people who build the categories. We have to make this simple. Getting a core menu down to something that the participants can utilize effectively is part and parcel of being a valued partner in this investment selection area.

Skrobe: An adviser plays a key role here: just to be rational, to make those points, and to speak your mind and tell your plan sponsor clients what you think and give them advice rather than try to make everyone happy. We’ll have better outcomes, and participants will feel better about what they’re investing in, and they won’t feel intimidated by a menu that doesn’t make any sense for them.

So my advice would be hit it hard as far as skinning down investment menus, make it rational, make it so the common person can understand what they’re doing. Too much choice is a bad thing.

Sarsynski: If we talk about what investments you may have in the lineup, what investments participants select is generally less important than how much they put in, when determining how successful someone is going to be in retirement. However, about 15 years before retirement, participants generally begin to go into less risky funds because they cannot recover from any volatility in the market. So those little tidbits are very important to keep communicating to your clients.

The other thing is order. It’s kind of interesting: If you put some of your lineups first, those probably will be checked off first, so you have to be very careful in terms of how you present it at the participant level.