Most new 401(k) plan sponsor clients don’t ask for help in changing over to an outcomes-based focus. Usually, they want help fixing one of there “pain points”—and advisors should address it before opening a dialogue about shifting to an outcomes focus.
It’s the duty of plan advisors to meet clients where they are. Some sponsors have a paternalistic, long-term mindset, and they quickly grasp the outcomes-based approach. But many employers have not reached that point. Instead, something isn’t working well with their plan, and it has created distractions for them that preclude big-picture thinking.
In those cases, quickly rolling out a major new outcomes-based fiduciary approach doesn’t make sense. Advisors shouldn’t step in and start making wholesale changes to a plan if the sponsor isn’t ready for it.
It’s better to take a patient approach: start by helping to fix the new sponsor’s pain point, and in turn get to know the participants’, as well as the sponsor’s, mindset and level of sophistication about the plan. Then, begin rolling out the concepts behind an outcomes focus to the sponsor, one by one.
To kick off the conversation, begin by talking about why an outcomes-focused mindset makes sense in the current regulatory environment. Mention the Employee Retirement Income Security Act, or ERISA, explaining that the fiduciary-governance law should be the focus as fiduciaries for the plan.
After that, make the business case to sponsors for an outcomes focus, including utilizing custom models as the qualified default investment alternative (QDIA).
Three messages about moving to custom models as the QDIA really resonate with sponsors from both a business and fiduciary standpoint:
- First, it can lower the investment costs for participants.
- Second, participants get a more customized investment allocation and more personal attention.
- And third, this approach allows the sponsor to offer participants a conservative glide path option.
Once the employer understands the business and regulatory case, chat about how moving to an outcomes focus helps employees’ financial wellness. Demonstrate how the typical defined contribution plan setup has led many Americans down the path toward a retirement-savings crisis.
As a novel way to explain to sponsors what’s happening, Two West Advisors, for example, employs a gamification technique. Our advisors use a customized deck of cards to illustrate outcomes focus concepts to plan sponsors—literally laying our cards on the table. Once a sponsor understands the bigger picture, momentum builds and he or she realizes they need to do something different with their plan.
Next, discuss how a sponsor moving to an outcomes focus—using the goal of employees retiring with at least 80 percent of their pre-retirement income—helps get employees on track for a successful retirement. Talking about how it’s the right thing to do for their employees makes sponsors feel good about embarking on this change.
At that point, the conversation with sponsors gets fun: strategize ways to get employees excited about the change. For instance, at Two West Advisors, our approach includes rolling out the program in a pep rally-type atmosphere.
Employers sometimes have hesitations about moving to an outcomes-based approach. They voice concerns mostly about costs, and about the potential distraction for them, with a sense of, “I don’t have time for this.” In response, show them a breakdown of the costs of shifting to custom models, and how it actually can reduce their participants’ investment fees.
If the sponsor really doesn’t feel he or she has enough time to shift from an off-the-shelf QDIA to custom models, it may not be the right moment to make that change. In that case, focus on other areas of the plan service model.
Beyond investment selection, four other key areas include plan design, fiduciary governance, provider analysis and employee experience. Advisors can implement best practices in the other areas, and then revisit the custom-models idea in 12 or 18 months when the sponsor is ready to have that conversation.
Vern Cushenbery, CFA, CPA, is the chief investment officer and a managing member at Kansas City-based Two West Advisors. He can be reached at vern@twowestadvisors.com.
Vern Cushenbery, CFA, CPA, is the chief investment officer and a managing member at Kansas City-based Two West Advisors. He can be reached at vern@twowestadvisors.com.
