Though the defined benefit marketplace continues its steep decline, the 401(k) marketplace is booming: As of last year, 401(k)s held roughly $3.5 trillion of retirement assets, according to a 2012 survey by the Investment Company Institute -- a number that consulting firm McKinsey & Co. projects will grow to $5.5 trillion in 2015. For retirement plan advisors, this represents a tremendous opportunity to retain and grow business.
Unfortunately, plan advisors face stiff competition in an increasingly commoditized marketplace. That means they must provide superior service and innovative plan solutions that benefit both themselves and plan sponsors. Here are five ways to do that:
1. Highlight the benefits of fully automated retirement plans.
Automating 401(k) plans boosts retirement savings -- a win-win for plan advisors and sponsors. For plan advisors, auto-enrollment increases the number of people saving -- the plan participation rate for companies with auto-enrollment averages 85 percent, while it’s just 67 percent for those without it, according to research by human resources consulting firm Aon Hewitt from 2011 -- as well as the total amount saved in the plan. For plan sponsors, this offers the opportunity to boost employees’ retirement security -- the average American studied has saved $47,732 less than he needs just to cover basic expenses and health care in retirement, according to a 2010 study by the Employee Benefit Research Institute. Plan advisors should also talk to sponsors about adding in auto-escalation to bump up savings rates further, as well as auto-rebalancing to help ensure employees have the right mix of investments from year to year (many employees just pick a certain investment(s) and then leave it, a study released by Prudential in 2011 revealed).
Undoubtedly, plan advisors fear that if they automate the plan, plan sponsors will feel they don’t add as much value anymore. But plan advisors may also do the following for plan sponsors: 1) Create a strategy to educate plan participants -- be it through one-on-one consultations, webinars or another method -- about their benefits and retirement best practices; 2) Deliver a list of yearly goals and end-of-year progress reports; 3) Create and revise plan design to meet goals; 4) Advise and assist with fiduciary responsibilities; 5) Monitor investments, generate reports on each and showcase how they are helping meet plan goals; 6) Conduct investment due diligence and provide documentation; 7) Prepare an annual stewardship report, outlining accomplishments.
2. Show plan sponsors that automation costs may be lower than they think.
Many retirement plan advisors avoid talking to plan sponsors about automating their 401(k) plans because they know many think it will be cost prohibitive. But in reality, automation costs -- the two main ones are administrative and matching-funds costs -- are often lower than plan sponsors realize, and there are things sponsors can do to dramatically cut costs.
Administrative costs tend to be minimal, and sponsors who charge these back to plan participants don’t pay them (sponsors just have to disclose this). Matching funds costs are also often lower than expected, because new enrollees typically contribute at, not above, the default rate, a study by the National Bureau of Economic Research revealed, which in many cases is 3 percent or less, according to a 2012 survey from Aon Hewitt. This means that plan sponsors will only pay the default rate, which is often lower than the full rate that many sponsors match. Even if plan sponsors have a higher default rate, the total match that auto-enrollees receive is usually less than for people who had already been contributing to the plan. Plus, plan sponsors don’t have to offer a match (they can always add this later) and can add automation gradually to spread out the costs.
3. Offer clients new, game-changing ideas.
Due in part to the new fee disclosure regulations found under ERISA 408(b)(2), plan sponsors are now increasingly sensitive to plan expenses, which means plan advisors must justify their fees by providing added benefits to clients. One of the best ways to do this is by bringing innovative ideas to the table.
In-plan income products are one of the main ideas plan sponsors often don’t consider. Just 10 percent of plan sponsors surveyed offer an in-plan annuity product, a 2013 study by Aon Hewitt found, even though seven in 10 investors studied say these types of products appeal to them, research from Prudential from 2011 revealed. What’s more, the U.S. Government Accountability Office now recommends them for retirement security and with the drop in the number of defined benefit plans, declining Social Security payouts and Americans’ low retirement balances and increased longevity, it’s easy to see why. For the average 401(k) saver, the addition of a lifetime guaranteed minimum withdrawal benefit to a target date fund could potentially cut the amount of assets she needs to generate for retirement by as much as 36 percent, a 2011 study by Prudential found.
These days, many of your clients who have defined benefit plans want to shift out of them or lower their risk and focus more on offering defined contribution plans. For them, consider a pension risk transfer solution, which uses annuities to help plan sponsors transfer plan risk to an insurance company. There are two main types: 1) the pension buy-out, which allows plan sponsors to pay the insurance company a series of annuity payments in exchange for the insurance company assuming responsibility for the plan; and 2) the pension buy-in (the first of these was done in the U.S. in 2011), which allows sponsors to purchase a single-premium or bulk annuity from an insurance company, giving them a series of regular payments into the plan, thereby reducing pension risk.
4. Maintain value in a competitive market.
Stable value funds combine an investment in fixed-income securities with a return of principal, plus interest guaranteed by the claims-paying ability of the underlying insurance company. Despite the fact that stable value funds can help ensure that your client’s investment offerings deliver consistent value, many companies still don’t offer them. Though 80 percent of large-company plans offer a stable value investment option, only about 60 percent of all workplace retirement plans do, a 2012 study by Aon Hewitt found. In the past few years, many stable value funds have returned more than 2 percent each year, according to the Stable Value Investment Association’s 2012 Annual Investment Policy Survey, far above recent returns on many other fixed-income investments like money market funds and short-term bond funds.
Plan sponsors and their advisors may have concerns about stable value in a rising interest rate environment. But if rates spike, either up or down, stable value funds are designed to provide more predictability and consistency. So should rates change rapidly, stable value will respond, albeit not as quickly as some other investments. This smoothing and steady return makes stable value an excellent anchor or cornerstone of a well-diversified, well-managed retirement portfolio. While many portfolios are equity heavy, stable value provides diversity even within the fixed-income arena, with liquidity, competitive crediting or interest rates and a guarantee of return of principal.
5. Select the best qualified default investment alternative (QDIA).
It’s essential for plan advisors to help plan sponsors pick the right QDIA options for their plan, since nearly seven in ten employees say they exert “little to no effort” in the benefits selection process, a Prudential study released in 2011 revealed. This means that the default investment option may be the only investment many participants own in your plan. Popular QDIAs are often target-date funds, but with the myriad options, you need to help plan sponsors select the one that most closely matches the plan’s investment policy goals, which should take into account plan participant characteristics, investment performance and risk, and more.
Plan sponsors may want to consider emerging, but potentially valuable, hybrid products, which deliver equity and bond exposure in addition to built-in lifetime income guarantees. Although they don’t guarantee market value, these products are becoming increasingly important to retirement security since many people have not saved enough for retirement and are living longer, which means they need a sustained potential for growth, downside income protection, access to their funds, plus guaranteed lifetime income.
Harry Dalessio is senior vice president of strategic relationships for Prudential Retirement.