AdvisorNews - December 2014
How to help 401(k) plan participants deal constructively with their investment worries

Posted March 11, 2014 by Robert C. Lawton at 09:41AM. Comments (0)

We all worry. You might be surprised to learn that the worry we devote to our 401(k) plan investments has been studied. Worry is never constructive. It is even less helpful when it alters the way we manage our 401(k) plan investments. Recent behavioral finance studies have shown that the more we worry about our investments, the more conservatively we invest.

We run from stocks due to worry
Recent studies have shown that the more frequently investors review their portfolios, the more conservatively they invest. This is not a positive outcome. Investing too conservatively keeps 401(k) plan investors from building an account balance large enough to retire without making significant changes to their standard of living. Investors who reviewed their portfolios on a monthly basis had allocations of roughly 60% bonds and 40% stocks. Conversely, those that reviewed their portfolios annually had allocations of 70% stocks 30% bonds — a huge difference.

Volatility causes loss aversion
Researchers found that the more frequently investors reviewed their portfolios, the more they became aware of short-term volatility and the impact it had on their balances. More frequent exposure to volatility resulted in feelings of loss aversion — study participants became more afraid of the negative impacts of volatility. Even though losses due to volatility were not realized (since participants took no action) the paper losses monthly viewers experienced caused them to adopt much more conservative portfolio allocations.

Overcoming participant worry in 401(k) plans
Unfortunately participants are most likely to review their portfolios when the market falls. Fear of additional loss causes many to realize losses by selling equities and electing a more conservative allocation. Plan sponsors should make sure, in times of market volatility, to encourage participants not to deviate from their savings and investment plans. They should also strongly encourage participants to call the plan’s investment adviser before making any changes.

Many participants make bad decisions based upon fear during periods of time when the stock market falls. Try and help them avoid these mistakes by encouraging them to reach out to your investment adviser.




The future of retirement plan advising
Posted July 15, 2014 by Craig J. Davidson, CEBS at 09:46AM.

A long, long time ago in a place far away, Americans made children, lots of them. We call this group the baby boom generation. They comprise 76 million souls born from 1946 through 1964. Boomers left their footprint in a big way at every life change. They started retiring around 2008 and will continue to exit the workforce en masse through 2026. For retirement advisers, this group represents your future for the next many years, and then some.

Targeting boomers for DC plan sales is nothing new. Focus your efforts on improving outcomes for clients in the face of frightening statistics, of which we cover a few below. Your business tilts toward success or failure based in part on your ability to get your clients out of those statistical groups.

Numbers spell your strategy
Let us look at a few data points to help you define a strategy for your retirement planning business. Consider these numbers:
  • 46% of Americans have less than $10,000 saved for retirement.
  • 40% of baby boomers now plan to work until they die.
  • 36% of Americans say they don’t contribute anything at all to their savings.
  • 87% of adults say they are not confident about having money for a comfortable retirement.
According to the Federal Reserve Bank of St. Louis, the American savings rate ticked along this past May at 4.5%. We collectively save less than five cents of every dollar earned.

The U.S. Census Bureau estimates that a male born today can expect to live 76 years. Father Time graciously allows females a bit more time with a life expectancy of 81.

These and other statistics sound a clarion call that a day of reckoning is coming for the American workforce. The three-legged stool of retirement suddenly looks like pogo stick.

Retirement advising and technology
You must be a superior professional adviser with lots of technology knowhow to handle customer service and provide added value.
This technological knowledge, as applied to retirement, includes great CRM features for your client relationships. The value-add component means slick predictive modelling through various scenarios with many more variables that affect financial needs and a good quality of life in retirement. Use technology that creates a complete understanding of systematic and nonsystematic risk, i.e., beta and positive alpha coefficients.

Your competition probably does not talk in these terms. Have technology demonstrate the link between volatility and risk. We, of course, know they are one in the same, but most of your clients do not know that. Employ technology that shows the effect of different types of risk on their retirement savings since it will play a big part in asset allocation given the dismal statistics bulleted above.

Technology in retirement planning abounds. Use tools that assist clients with holistic planning. For example, what is the role of health costs in retirement planning and asset allocation? What about reverse mortgages? Employ tech tools that produce a financial plan. Individual financial plans differentiate you in the marketplace. Above all, strive to add value as a technology expert. Embrace the lemon numbers depicted in the aggregate savings numbers above and turn them into lemonade with a solid, positive plan that works.



Revenue sharing is on the decline in 401k plans
Three reasons why it will soon be gone altogether.


Revenue Sharing

I write to bury revenue sharing, not to bash it.

Revenue sharing
is the practice of adding additional non-investment related fees to the expense ratio of a mutual fund. These additional fees are then paid out to various service providers – usually unrelated to the fund company managing the fund.

Why is this controversial? Mutual fund returns are reported net of fees, so the money collected from investors and paid out to other parties is not explicitly reported to investors, it simply reduces the net investment return of the fund. Because investors don’t see the fees being deducted, the true cost of the fees charged is often overlooked when calculating the total cost of plan services.

Revenue sharing is limited to small business retirement plans
Larger 401k plans don’t have revenue sharing. Large employer plans have access to managed accounts and/or institutional share classes. These investments have lower expense ratios and no revenue sharing arrangements. Larger employers negotiate for the best fees for all plan services, and then determine how those fees should be allocated to plan participants or borne by the plan sponsor. Revenue sharing shifts all additional fees, by definition, to the plan participants, thus limiting flexibility. Revenue sharing, therefore, is limited to smaller retirement plans and the “retail” class shares of mutual funds.

Reports indicate revenue sharing has been declining over the last few years – both in terms of the percentage of plans including it and as a portion of the expense ratio. Fee disclosure requirements have likely played at least some small part in this trend. However, I would argue that market forces have been more influential in reducing the incidence of revenue sharing. I predict these market forces will bring the practice to an end – and soon.

Key takeaway: Plans grow out of revenue sharing, not into it.
As plan assets increase, plans tend to review fees, and to move away from the retail class of shares – and revenue sharing. Cause and effect? Yes.

Here are the market forces driving plans away from revenue sharing:
Revenue sharing is no longer “invisible.” With the rise in popularity of low-cost investments – particularly index funds and ETFs, more scrutiny is being placed on the total expense ratio of plan investments. The fee baseline is now about 0.15% (or less) for index funds. Funds with a typical management fee and revenue sharing now stand out more than just a few years ago when the baseline fee was higher. And the demand for index funds is increasing. As more small employers opt for low-cost investments, the more pressure that will be placed on fund companies to be competitive on fees. Look for fund companies to dump the “ballast” of revenue sharing in order to better compete on price as market competition continues to drive fees down.

Revenue sharing is not equitable. Unless all investments in a plan are subject to the same revenue sharing percentage, fees are being applied inequitably to plan participants. We see examples of this issue every day in plans mixing funds that have and do not have revenue sharing. Investors choosing revenue sharing funds pay a disproportionate portion of plan expenses – often without their knowledge. The DOL warns that sponsors are obligated to monitor the overall reasonableness and proportionality of fees – including those paid through revenue sharing arrangements. Sponsors evaluating fees are more and more rejecting all revenue sharing arrangements – they are just too time consuming and difficult to administer equitably. Small plans will continue to move away from revenue sharing as they continue to strive to meet fiduciary standards.

Revenue sharing is not efficient. Revenue sharing adds complexity to 401k plan administration – and drag. Form 5500 filings, plan audits, participant communications and plan fiduciary documentation are all made more difficult – and expensive – because of revenue sharing. And the benefits of revenue sharing? Fees are deducted from plan assets before investment returns – little value in our internet-driven culture of transparency. As sponsors become more educated on plan expenses and fiduciary responsibilities, they continue to opt out of complex fee arrangements in favor of fully-disclosed, transparent fee arrangements. This trend is not going away.

Revenue sharing is winding down. Small businesses will be the winners when it is gone.




Five Reasons to Consider Teaming with Local TPAs
Deb Rubin, senior vice president of TPA and specialist adviser distribution for Transamerica Retirement Solutions

Jul 28, 2014 --- Successful financial advisers who work primarily with employer-sponsored retirement plans, also known as specialist advisers, guide plan sponsors through the sometimes-complicated landscape of managing their company retirement plan. ---

Specialist advisers work with retirement plan providers that they like and trust to handle their clients with care. Advisers can choose to work with “bundled” providers that provide recordkeeping, investment platforms and administration, or opt for an “unbundled” solution by adding a local third party administrator (TPA) into the servicing mix.

Third party administrators (TPAs) add value for plan sponsors, participants, and especially for financial advisers—both during the sales process and over the life of a plan. I spoke with some extremely successful specialist advisers to learn how working with TPAs adds efficiency to their business models and provides customers with a higher level of expertise.

Here are five reasons you may want to seriously consider working with a TPA:

TPAs have specific expertise that will benefit your clients.
TPAs are, by definition, administration and retirement plan design experts. Plan advisers typically have different areas of expertise, with many concentrating on investments, direct client servicing, and participant education. So there’s sometimes the temptation to minimize the importance of good plan design, as if that’s a commodity. Many savvy advisers feel the investments are the same wherever you go, but really good, insightful plan design is a rare find.

“Every provider has good funds and every provider has terrible funds. Plan design makes a plan work or not,” says Robert Sweat, CFP of Principal Financial Group, a veteran financial adviser with more than a decade of experience in the defined contribution market. “In my experience, funds just don’t help to differentiate one plan from another. Because every client is different, making a plan work comes down to plan design.”

There’s also a benefit to showing prospective clients you have the wherewithal to assemble a team of experts, all on their behalf. “I don’t want to be perceived as a jack of all trades,” says Sweat. “I want the client to know the TPA and I have different roles—my job is to recognize the set of facts for a given plan, so I know which expert I want to bring in.”

In a sales-driven environment, the value of administration is often overlooked, according to Charles Williams, a financial adviser with Sheridan Road Financial, LLC, a leading investment consulting and retirement advisory firm. “Most clients focus on investments, and don’t really value the administration component,” says Williams. “But let’s face it, administration is not the exciting part of a plan…until you find a TPA who does an excellent job, then you see how clients react when their plans outperform their initial expectations.”

TPAs can improve outcomes for both sponsors and participants.

Part of the reason I love working in the retirement plan business is because you can see a tangible result of your efforts in the form of participant outcomes. Sure, there are times when we can also help save plan sponsors money for their companies—but it’s helping participants that provides me with a tremendous amount of satisfaction.

Many financial advisers feel the same way. “Personally, I’ve made a conscious decision to work with smaller companies and provide more value. That way, your impact can be seen and felt,” says Aaron Taylor, a registered representative with Lang Financial Group, Inc. in Cincinnati, Ohio.

“Our TPA partners are of the utmost importance,” continues Taylor. “We do a lot of work with plan design, profit sharing allocation methods, cash balance plans—whatever a client needs to maximize the retirement benefit for themselves and their employees. To that end, a proficient TPA is absolutely invaluable.”

Taylor shares a specific example to drive the point home. “One of our recent clients, a large manufacturing company, was struggling with how to reduce spending. We helped save them over $80,000 in just six months. Plus, they didn’t cut any services to their employees, nor did their employees have to pay more. This wouldn’t have been possible without the work of our TPA partner.”

Local, personalized service makes clients very happy and also benefits your business.
The more advisers I talk to, the more I see that those who have tried working with TPAs tend to stick with it. “I try to work with a TPA in almost every situation,” says Todd Colburn, CFP, a wealth management adviser from Nashville, Tennessee. “There are two reasons why. First, I prefer a component-based approach, where any underperforming role—including mine—can easily be replaced without disrupting the roles that are working well, and second, TPAs are just more capable of conforming to the needs and requests of my clients.”

In some cases, winning a new plan comes down to hands-on service. And there’s nothing that plan sponsor clients like more than an administrator who’s accessible and lives in their own backyard. “Bundled providers may do a fine job, but our clients like to work with someone on a local level,” says Sweat.

Local TPAs who are readily available for client meetings can be a distinct advantage. “The bundled plan administration might be just as good as a local TPA, but if they’re not here on the ground then it isn’t helping me that much. They can’t be in the meetings, but a local person can. Something I thought couldn’t be done, it turns out it could be, and that’s all because the TPA was local and able to be in the room with me,” says Sweat.

Local service is nice, but the crux of the matter is about building relationships—and that’s just easier when you can meet face-to-face once in a while or quickly if a need arises, according to John Spach, AIF with 401k Advisors & 403b Advisors out of Los Angeles. “TPAs need to have real relationships with clients; they’re not just there for compliance testing.” Quite the contrary, says Spach, “TPAs are the frontline staff, and as such need to develop relationships.”

TPAs can help you close sales.
When I was in a sales role, I would always bring a local TPA to a finals meeting. Not only could they answer very technical questions and make specific recommendations about plan design right on the spot, but they made me look good. And frankly, they could zero in on issues and concerns that I couldn’t have done by myself.

Seasoned TPAs know the right questions to ask on a sales call, says Taylor. “TPAs really understand client needs—and once we start talking about plan design, a good TPA is asking questions about the questions.” Those insightful questions can really give a prospect the impression of how thoughtful a partner this TPA can be. “Sometimes that can make all the difference to winning a plan,” he says.
A successful TPA partnership can help your business grow and thrive.

John Spach has a wonderful relationship with a long-time TPA partner and they’ve struck a nice balance as true professional partners. “When we first started working together in the old days, [my TPA] would spew out pension terminology and I would generate the IPS, but it’s as if we were speaking two different languages,” Spach explains. Over time, however, that relationship grew into a successful symbiosis. “Through the years, we moved from being reactive to client needs to being on the same page about how to approach a case. Now, we both enjoy leading with automatic enrollment and automatic escalation recommendations to win business and design plans that produce results.”



Advisers Can Break Down Savings Barriers
Jill Cornfield
Aug 04, 2014 --- Having an actual plan makes a big difference to achieving retirement goals, and having an actual adviser makes a big difference in having that plan, research says. ---

Nearly a quarter of Baby Boomers (22%) report having no savings for retirement, according to data from the “IRI Fact Book 2014” from the Insured Retirement Institute (IRI), which the institute is billing as a primer on the latest retirement income trends and strategies.

Among those Boomers who said they do have savings for retirement, four out of 10 reported having saved less than $100,000. According to “Age of Opportunity: Americans Transitioning into Retirement,” a study by The Hartford cited in IRI’s book, one in three retirees state that if they could change just one aspect of their retirement, it would be to save more money and be better prepared financially (see “As Long As They’re Healthy…”).

IRI contends that while automatic enrollment and automatic deferral escalation features in employer-sponsored retirement plans have helped retirement savings levels take an upward swing, they may still not be enough to ensure adequate savings. Individuals need to be more engaged in retirement planning, the report says. Seeking help from a financial adviser is one of the most effective ways for workplace savers to become more proactive, IRI says.

A number of factors—increased responsibility placed on individuals for structuring their own retirement income, coupled with the recent headwinds from the financial crisis, the subsequent recession, and a slow economic recovery—have created a set of economic conditions that have negatively affected the retirement savings behaviors of Baby Boomers, the report says.

In a section of the report titled “Barriers to Saving,” IRI examines some inhibitors to saving for retirement and how potential changes to tax policy can exacerbate these impediments. IRI researchers also explore how working with an adviser can help achieve desired levels of savings and how annuities can help as sustainable retirement income vehicles in the defined contribution plan context.

Key Findings
The “Barriers to Savings” section found the following:
  • 21% of Boomers have stopped contributing to a retirement plan;
  • 20% have had difficulty paying the mortgage/rent in the past 12 months;
  • 54% stated they would be less likely to save if federal income taxes increased; and
  • 39% stated they would be less likely to save if capital gains taxes increased.
Given the above findings, IRI recommends that tax policy should follow a do-no-harm principal, contending that tax increases will dampen Boomers’ retirement savings. If tax deferral for growth within retirement plans is reduced or eliminated, 40% of Boomers would be less likely to save for retirement.

Increases in federal income taxes and capital gains taxes would have an even stronger negative effect on Boomers’ retirement saving behaviors, IRI says. The reason for such negative effects on savings is that these increases would reduce the after-tax income of workers, putting additional stresses on already stressed family budgets.

There are ways to overcome the barriers, IRI says in its report. Those who work with an adviser and set up a plan tend to fare better. Among Boomers who work with a financial adviser, 74% had determined a savings goal. IRI found that having a plan for retirement increases retirement confidence levels. Nearly half of Boomers with a plan (49%) prepared by an adviser said they were extremely or very confident they will have enough money to live comfortably throughout retirement. In comparison, just 20% of Boomers whose advisers did not prepare a written savings and investing plan expressed confidence.

Nearly 43% of Boomers who have consulted an adviser reported that they are very or extremely confident they will have enough money to live comfortably throughout retirement, compared with 33% who have not consulted a financial adviser. The difference in confidence levels stems from having prepared a financial plan with an adviser. IRI found that among Boomers working with a financial adviser, 75% stated that the financial adviser prepared a retirement plan.

The IRI Fact Book 2014 offers recent retirement income research, industry data and sales reports for the variable and fixed annuity markets. This edition focuses on explaining features of annuity products and outlines considerations for financial advisers for including insured retirement strategies in retirement income plans. The IRI Fact Book 2014 can be downloaded from the website of the IRI.