Plan sponsors want it; RIAs have it. A new survey from TD Ameritrade Institutional finds RIAs “provide 401(k) plan sponsors with greater support than other plan advisors, and by a wide margin.”
Indeed, the company claims RIAs provide support at roughly two times the rate of other advisors or 401(k) plan administrators, and are twice as likely to offer education services to plan sponsors, according to the 2015 Plan Sponsor Sentiment Survey.
This higher level of support extends to 401(k) plan participants as well: RIAs offer individual advice to participants at nearly twice the rate of other retirement plan advisors or service providers. They are also 64 percent more likely to offer investment advice to the plan sponsor. RIAs are 60 percent more likely to advise on plan selection and design, and 34 percent more likely to offer plan sponsors support with participant enrollment.
Plan sponsors that use RIAs therefore say they are pleased with their services and find it easy to work with them. Ninety percent give RIAs top marks for their knowledge of potential plan investment options and for their assistance in meeting fiduciary requirements. More than eight in 10 are satisfied with RIAs when it comes to selecting plan administrators and record-keeping vendors, and with giving investment advice to participants.
“The RIA model, one that is fiduciary and fee-based, is working,” said John Newman, managing director of retirement plan services with TD Ameritrade Institutional. “It naturally lends itself to a discussion with plan sponsors about their fiduciary responsibilities, which is why RIAs have been so successful in the space.”
However, while plan sponsors that work with ERISA 3(21) and 3(38) RIAs are more likely to be aware of their fiduciary responsibilities, and therefore more like to have taken necessary steps, RIAs in general need to do a better job of marking their capabilities and services known.
“The message needs to be that for those plan sponsors not working with RIAs, this model is out there and available,” Newman added.
One item that surprised the survey’s authors, however, was the general discomfort RIAs have with fee-disclosure rules four years after their implementation by regulators.
“As you know, the rule goes back to February 2012, so we were taken aback that it was still an issue for them,” he said. “For plan sponsors that are not aligning with an RIA, there was almost no awareness of the fee-disclosure regulations.”
An Opportunity for Open Architecture
Despite a “deep bench” of services and support, TDAI notes RIAs are used by 28 percent of the plan sponsors surveyed. That means there is a significant opportunity for advisors to increase their share of the market over the next few years.
RIAs offer an open-architecture approach when it comes to recommending investments for clients. They offer the same approach for retirement plan solutions, and that could be attractive to plan sponsors shopping around for a plan provider.
The survey found that 60 percent of plan sponsors would consider switching plan providers over the next year, and that sponsors are most likely to change providers to reduce plan fees or gain access to more diverse investment alternatives.
“Plan sponsors report that two items – the investment menu and lower fees – are what’s most important to them,” Newman said. “They think they’re separate issues, not realizing that what they offer on the investment menu directly relates to fees. They’re interdependent, and why open architecture is so important.”
Retirement Plans Under Review
Improving the participant experience is top of mind for plan sponsors, which state that evaluating current investment choices and encouraging greater plan participation are their main goals for the upcoming year.
Plan sponsors are most concerned about the diversity of their investment line up, possibly for good reason. According to the survey, most retirement plans offer mutual funds, despite enhanced products and service offerings making headlines. Survey respondents report that only 27 percent of their retirement plans offer target date or lifecycle funds, and just 15 percent include exchange-traded funds (ETFs). Only one in four plans surveyed has auto-enrollment and 15 percent offer self-directed brokerage accounts (SBDAs).
Plan sponsors also recognize that current and would-be participants want individual help on investing. In fact, 44 percent of plan sponsors characterize participants as hungry for one-on-one advice from a financial advisor, particularly when it comes to planning for and investing in retirement, yet only 27 percent currently offer participants one-on-one investment advice.
“When plan sponsors consider the design of their retirement plans, it’s clear that two things are paramount: creating the most effective investment menu and offering skilled investment advice to their participants,” said Newman. “Frankly, RIAs are uniquely positioned to deliver both.”
More Education Needed on Fiduciary Rules and Regulations
Plan sponsors rank fiduciary education as one of the most important services they receive from their plan advisors, right alongside performance reporting and participant investment advice. The survey found there is a wide knowledge gap among plan sponsors when it comes to understanding how changing regulatory requirements may impact their role as fiduciaries.
- Fee Disclosure. Sixty-two percent do not fully understand the implication of the 2012 Department of Labor (DOL) rules on fee disclosure. Plan sponsors using RIAs are already receiving updates and education on this issue from their advisors at twice the rate of those who do not use RIAs. In fact, 30 percent of plan sponsors that do not use a RIA say they have not received any communications on fee disclosure requirements.
- Fiduciary Compliance. Plan sponsors report being similarly unaware of the DOL’s proposed new rule on fiduciary compliance. More than half say they do not have enough information, while an additional 15 percent say they have never heard of the proposed rule.
- Tibble vs. Edison. Although 70 percent may not know the details of the U.S. Supreme Court’s decision on investment and fee monitoring, plan sponsors believe that their plan offerings should be in the best interests of participants. But even though seven out of 10 sponsors benchmark the fees and performance of funds offered in their retirement plans at least once a year, more than half were unsure about whether their plan’s mutual fund options are in the least expensive share class available to their plan.
“A lot is changing for employer-sponsored retirement plans, so it’s not surprising that plan sponsors need more guidance and services for themselves and for their participants,” said Newman. “Now more than ever, RIAs are poised to shine for plan sponsors – they are hard-wired to deliver fiduciary support and investment advice in a way that other providers are not.”
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.
