What’s the biggest 401(k) surprise to come from this year’s “Plan Sponsor Attitudes” survey from investment-overlord Fidelity?
“Plan sponsors are moving away from more traditional evaluations of a 401(k) plan, such as price, and really shifted the focus to improving retirement outcomes for their employees,” said Jordan Burgess, the head of specialist field sales who oversees defined contribution investment only (DCIO) sales at Fidelity Financial Advisor Solutions. “It’s actually a continuation of the theme we started to see last year.”
Burgess added that of the plan sponsors surveyed, an overwhelming majority (84 percent) use an advisor. Of those who do, 17 percent are actively looking to switch advisors–which is the highest number since the survey was launched.
To stand out among growing competition, Burgess suggests that retirement plan advisors adopt the habits:
- Align with Clients’ Areas of Focus
A large proportion (86 percent) of plan sponsors said they have participants who are delaying retirement due to a lack of savings. This has contributed to a greater awareness among plan sponsors of the consequences of delaying retirement and an increased focus in preparing their employees for retirement.
To help address these concerns, advisors should educate plan sponsors on plan design features that may improve savings rates. For example, implementing auto-enrollment may improve participation rates, which average 86 percent for plans with auto-enrollment and only 52 percent for those without. Combining auto-enrollment with an automatic annual increase program can be extremely effective. Of the participants who automatically take part in annual increases, only 7 percent dis-enroll within the first 12 months. Understanding the benefits of these features can help to drive their adoption.
While plan sponsors are increasingly focused on the costs of delaying retirement, two-thirds of them have not defined clear savings or retirement income goals for their plan participants. Advisors can play an important role in providing guidance on structuring plans for retirement. According to Fidelity research, defined contribution plans should strive to provide at least a 50 percent level of income replacement throughout retirement.
- Demonstrate Value Against Clients’ Key Success Measures
In addition, it is crucial for advisors to align and demonstrate their value against key success measures defined by their clients. Plan sponsors cite investment expertise as their No. 1 reason for using an advisor, with nearly two-thirds saying that they evaluate their advisor or consultant at least annually. The top areas of review are value delivered, investment performance, and cost and fees. Other factors, including effectiveness in ensuring plan compliance and meeting fiduciary responsibilities, also play a role in how plan sponsors assess advisors.
- Involve All Plan Sponsor Functions: CEOs, CFOs and HR
Typically, three key functions within the plan sponsor organization are involved in making plan decisions: the owner or CEO, the finance team, and the HR team. While they have knowledge of plan expenses and investments, owners and CEOs typically focus on advisor selection. Chief financial officers and others in finance-related roles reported a good understanding of the majority of fiduciary duties, particularly testing and reporting, plan expenses, and provider selection, while colleagues in human resources were most likely to demonstrate expertise in managing plan documents, handling contributions, as well as participant communications.
While there are differences in levels of understanding, all three functions are involved in a variety of plan decisions in one way or another, and each of them may be more broadly focused than is typically assumed. Advisors should look to include all key players in plan design decisions and help bridge any gaps in understanding.
- Partner with Record-keepers
While advisors remain the primary provider for a wide array of services, including monitoring investment performance and asset allocation, the capabilities of record-keepers have expanded significantly. Of the plan sponsors who use an advisor, nearly all of them (92 percent) said they have a relationship manager from a record-keeper who plays an important role for their plan.
On top of day-to-day troubleshooting, well over 85 percent of advised plan sponsors said their record-keepers have – over the past five years – started to offer services in areas such as employee communications and education, retirement and rollover planning, fee and fiduciary disclosure, and information on plan design and testing. In addition, the influence of record-keepers on plan design changes tends to increase with the size of plans.
Advisors continue to play the primary role in consulting on 401(k) plan design. As the role and capabilities of record-keepers grow, plan sponsors demonstrated increased satisfaction when both advisors and record-keepers have an impact on plan design decisions. This is an opportunity for advisors to remain engaged – even with sponsors of larger plans – by identifying areas where they can team up with their clients’ record-keepers and work together as partners, allowing them to focus on areas where they are uniquely positioned to deliver value, such as consulting on plan design.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
