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AdvisorNews - December, 2012

Unintended consequences
ERISA 408(b)(2) fee disclosure may lead to less service and options

By Tom Goodson
October 1, 2012
The Department of Labor finally implemented the Employee Retirement Income Security Act 408(b)(2) regulation on July 1 after multiple fits and starts. The overriding intent is noble - defined benefit and defined contribution pension plan providers are now required to disclose the internal costs and fees of operating 401(k) retirement plans. With this "full disclosure," a self-correction of plan pricing may occur. As fees are now clearly stated, fiduciaries and plan sponsors will compare apples to apples, and, I believe, shop for a less expensive plan. As a result, higher-cost plans will be replaced with lower-cost plans.

Whilst 408(b)(2) doesn't specifically require plan sponsors to replace their plans with the lowest fee service plans, the lure of saving money will certainly attract a greater market share. One of the unintended consequences and repercussions, which may not become evident for a few years but could have a dramatic and negative impact on 401(k) participants, is that these lower cost plans may compromise the level of service provided. As plans compete on price, services may take a backseat.

This natural progression toward less expensive plans will be occurring at a critical time. With interest rates at historic lows, and more than 10,000 baby boomers reaching retirement age every day for the next 18 years, according to Pew Research Center, an increased level of service from plan sponsors will be needed, not less.

Target-date fund effect

One of our greatest concerns for current plan participants, especially those who will soon be looking to retire, is that their plans contain target-date funds. Target-date funds are now very common in 401(k)s and as of Aug. 1, 2012 hold $380 billion of assets, according to CNN Money.

This is the default selection for many participants when plans are implemented and/or "mapped" and plans are transferred from one investment provider to another.

But if rising interest rates cause a significant move in the bond market, participants in income-heavy target-date funds may be adversely affected. The passive management of these types of investments could prove to be very detrimental to those close to retirement. A more active and tactical management approach may be more prudent to try and avoid negative market movements. The investments are now more readily available to advisers as broker-dealers continue to move toward levelized compensation. With plan providers allowing advisers to select investments rather than dictating portfolio percentages, the playing field is being leveled and the advisers can actively manage a plan based on the needs of the participants. In our opinion, active plan management by experienced investment advisers will be more important than ever.

The advisers that can position themselves as full service providers will continue to gain value in the 401(k) arena over the next few years. As the needs of the baby boomers become more obvious to companies and plan sponsors, the demand on plan providers to provide a higher level of service will increase, and that is a challenge for the 401(k) industry.

Reducing fees and lowering the service level may be the knee-jerk reaction for many companies as they comply with ERISA 408(b)(2).
AmeriFlex is forging a different path. Our focus remains not only to offer competitive fees, but also a full suite of services to 401(k) plan participants which focuses on the holistic development of their financial future. Our clients' financial goals are our top priority. In addition to financial planning, retirement income planning, and tactical asset management, we also offer long-term care and insurance services, trust services, Social Security and Medicare planning, and most recently our partnering with eMoney to offer an online platform for organizing financial accounts and important documents in one secure place ( Having been a provider of financial services for more than 24 years, we believe we are well positioned to assist our clients in achieving their goals.

I find it ironic that 408(b)(2) may actually set the bar lower and not higher in terms of protecting 401(k) participants. As plans migrate to lower fee offerings and are "mapped" for older participants landing in a default target-date fund that may be imbedded with bonds, we may have an unintended consequence as a result of 408(b)(2) damaging senior savings.

Plan fiduciaries were deemed to have violated their duty of prudence by selecting mutual funds whose fees were based on the retail share class rather than the institutional share class.

What RIAs must know about hidden, and excessive, fees in serving as fiduciaries to a 401(k) plan

With lawsuits and enforcement actions mounting, and new rules in place, what DOL wants is not all that abstract or theoretical anymore
Monday 10.8.12 by Guest Columnist Sheldon Geller

Being sued or assessed monetary sanctions is an effective but expensive way for 401(k) advisors to become familiar with the Labor Department’s way of viewing things.

There’s a better way: learning from the mistakes of other plan sponsors and financial advisors.

Perhaps nowhere is this more true than in the nettlesome area of fees — hidden ones, excessive ones and ones that fit the revenue-sharing mold. A plan fiduciary needs to identify, understand and evaluate fees and expenses relating to plan investments and services. Accordingly, monitoring fees and expenses in light of the services rendered for the plan is a continuing fiduciary responsibility, one that has prompted a recent wave of lawsuits, regulatory guidance and Department of Labor enforcement efforts.

Lawyers steeped in the Employee Retirement Income Security Act of 1974 can tell you what the rule is but they don’t do due diligence or know the difference between a reasonable and unreasonable fee. They’re more reactionary. Reasonableness is a function of the marketplace. So there has been a wave of cases alleging excess fees.

There is a knowledge gap between what lawsuit defendants are finding out and what plan sponsors and financial advisors with 401(k) plan fiduciary responsibility believe. There are some basic thoughts that an advisor can get a grip on that may avert lawsuits and make this a better industry.

Hidden fees
There are many types of hidden fees, commonly referred to in the aggregate as revenue sharing, which plan fiduciaries need to monitor for reasonableness. The increased public and regulatory interest in hidden fees has resulted in claims against service providers and plan sponsors, including individual fiduciaries responsible for plan management.

The questions of fact have included whether plan sponsors have acted prudently in selecting investment options and service providers. Claims have also included allegations that plan sponsors paid excessive fees directly or through indirect compensation known as revenue sharing, as well as permitting service providers to retain revenue-sharing payments instead of crediting these payments to the plans or to participant accounts.

Regulatory guidance
The Department of Labor issued final regulations under ERISA Section 404(a) mandating that sponsors of participant-directed plans provide fee and expense information to participants. Plan sponsors now need to provide participants with information related to fees and expenses for general administrative services, and fees and expenses chargeable to individual participant accounts. Participants are also entitled to investment-related information, including performance and benchmark data for the investment fund alternatives offered under a participant-directed plan.

The final regulations impose uniform disclosure requirements on all participant-directed plans. The preamble to the final regulations makes clear that the selection of investment alternatives is a fiduciary act for which there is fiduciary liability under ERISA. Plan fiduciaries have a duty to prudently select and monitor service providers and investment alternatives under a participant-directed plan.
The final regulations were preceded by the recently revised Schedule C, made a part of Form 5500, reporting requirements for plan sponsors, setting forth instructions for the enhanced reporting of a plan’s investment and service fees, including revenue sharing.
Revenue-sharing arrangements
Plaintiffs have alleged in excess-fee complaints that plan sponsors have not sufficiently scrutinized compensation and revenue- sharing arrangements, to the detriment of participants, thus violating ERISA.

Recent lawsuits have alleged that plan sponsor boards, officers and other in-house plan fiduciaries have breached their fiduciary duties by failing to investigate plan transactions, and have required fiduciaries to disclose based upon then existing law and related regulations.
Revenue sharing, sometimes referred to as “hidden compensation,” is a plan asset and refers to the portion of the expense ratio that is used to pay plan fees or credited to participant accounts. Plan sponsors may pay plan expenses with revenue, hard dollars, or a combination of both. The expense ratio, which is the fee charged by a mutual fund, decreases gains and increases losses of investments in participants’ accounts.

If a plan sponsor opts to apply revenue sharing as the method of paying plan fees, then it needs to determine if this method is in the best interest of plan participants. Greater revenue sharing may mean higher expense ratios and thus higher expenses for plan participants. Nevertheless, nothing in ERISA prohibits the use of revenue sharing to pay for services to a plan.

Further, once the fee amount is disclosed to plan participants, the failure to disclose the manner in which those fees were paid is not an ERISA violation, unless there was an intentionally misleading statement or a material omission. ERISA requires that plan participants be afforded the opportunity to obtain sufficient information to make informed investment decisions.

An uneducated plan sponsor may select what would appear to be free record keeping, without realizing that plan participants are paying the cost in the form of higher fund expenses. If a plan sponsor is unaware of the true cost of plan services, there is likelihood that the plan will pay excessive fees, adversely affecting plan participants and creating liability for the plan sponsor.

Recent ERISA fee litigation
There has been an increase in ERISA class action lawsuits alleging excessive fees charged to plan participant accounts in 401(k) plans. The basis for these lawsuits is that the plan fiduciary committed a breach of the duty of prudence in the selection of investment funds with excessive fees. Such a lawsuit was recently dismissed stating that the plan offered a range of investment alternatives with varying expenses and levels of risk.

Whereas, another lawsuit was reinstated for alleged imprudence with respect to a plan offering a far narrower range of investment alternatives that made it possible that the plan was imprudently managed by the plan sponsor. Recent court decisions have identified issues that 401(k) plan fiduciaries need to consider to ensure the prudent and most efficient management of a plan.

ERISA 404© provides plan fiduciaries with an affirmative defense to a claim of a fiduciary breach if the participates lose money on their investments. However, plan fiduciaries may be liable if they do not act prudently in the selection of the investment funds made available under a so-called 404© safe harbor, participant-directed 401(k) plan. The plan sponsor acting as a plan fiduciary must prudently select investments and determine whether such investments should continue to remain available as participant-directed investment options.
Claims of a breach of a fiduciary duty have been somewhat successful when a fiduciary selects mutual funds charging excessive fees. Plan fiduciaries were deemed to have violated their duty of prudence by selecting mutual funds whose fees were based on the retail share class rather than the institutional share class. The only difference between these two classes of funds was that the retail share class charges higher fees to plan participants. The fiduciaries needed to consider whether the institutional share class would have offered greater benefits to plan participants.

The Labor Department has taken the position that the 404© safe harbor does not protect fiduciaries to the extent that they act imprudently by selecting investment options with excessive fees. This position is based upon the premise that plan fiduciaries have a responsibility for the prudent selection and monitoring of investment options, which is outside the protection of the 404© safe harbor. The 404© safe harbor protects fiduciaries only from losses arising as a consequence of a participant’s independent exercise of control over plan assets in his or her account. The Labor Department also has argued that the duty to disclose fee information to plan participants arises both from ERISA’s statutory reporting and disclosure requirements and from its statutory duties of prudence and loyalty.

Best 401(k) plan fiduciary practices
The department’s enforcement efforts and recent case law have made clear that the focus is not on results achieved but rather on process. Accordingly, plan sponsor fiduciaries need to implement objective processes to identify fees, obtain fee disclosures, document service and fee reviews, and utilize independent third-party experts. Further, plan sponsors should conduct a fiduciary audit, in-house or with an independent expert, if a service provider fails to adequately disclose fees and expenses or if fees and expenses do not appear to be reasonable.

It is critical that plan fiduciaries have the requisite skills and knowledge to review and understand these issues. Plan fiduciaries are charged with the duty to monitor a plan’s fees, which has resulted in regulatory and litigation-driven scrutiny of plan fees. As a result, many plan sponsors are adopting best practices intended to satisfy this ERISA requirement.

Plan sponsors should consider the following best practices to monitor plan fees and expenses in an effort to comply with ERISA, recent case law and Labor Department initiatives:

Record-keeping fees. Plan sponsors must monitor fees and revenue sharing and demonstrate that plan sponsor decisions are in the best interest of the plan and for the exclusive benefit of plan participants. Plan sponsors should not permit service providers to retain revenue sharing that exceeds the value of plan services. It is not prudent to use an asset-based fee arrangement to pay for plan administration services if fees increase and no additional services are provided to the plan.

Fee offsets. Plan sponsors must negotiate mutual fund revenue-sharing offsets with service providers to reduce the cost of providing administrative services to plan participants. Plan sponsors must use their purchasing power — and, if it’s a large plan, their leverage — to negotiate and reduce plan fees payable with plan assets. Plan sponsors must uncover embedded fees, potential conflicts of interest and self-dealing and contract limitations in the service agreements of non-fiduciary service providers.

Selection of investments. Plan sponsors must document the process of evaluating alternative investment funds. Plan sponsors may not delete a well-performing fund or use an alternative share class to create more revenue sharing simply to offset fees. It is not prudent to replace funds to create additional revenue sharing if the change in fund selection provides no reasonable investment advantage to plan participants.

Investment policy statement. Plan sponsors must adhere to the guidelines, if any, set forth in the investment policy statements adopted by their board-appointed retirement plan committees with respect to fund replacements and the payment of plan fees with revenue sharing generated on the investment of plan assets in mutual funds.

Corporate services. Plan sponsors must avoid the payment of fees that exceed the market costs for plan services in order to subsidize corporate services for the plan sponsor, including payroll processing, welfare benefit plan and pension plan services.

Float income. Float, or the income and interest earned when contributions and disbursements are held temporarily during the transaction process, constitutes plan assets and, therefore, must be allocated only among 40 (k) plan participant accounts.

Fiduciary-monitoring criteria. Plan sponsors must review custody statements monthly, compare investment manager performance quarterly, evaluate service provider quality annually, and formally scrutinize service provider contract capabilities, service quality and fees every three years. Plan sponsors must follow processes and document fiduciary decisions relating to the use of plan assets to pay plan fees and expenses.

Courts continue to emphasize the importance of implementing and adhering to a deliberative process and focusing on the merits of employer decisions affecting plan participants. Plan sponsors may have to explain, if not defend, their actions in retaining service providers if they do not conduct a full request-for-proposal process to formally test the retirement plan marketplace every three years.
However, neither ERISA’s prudence requirement nor the exclusive-benefit rule support a rule of law requiring plan fiduciaries to conduct a competitive bidding process to support a fee and avoid litigation.

Service providers have an information advantage over plan sponsors. Nevertheless, in the context of 401(k)s and other participant-directed plans, ERISA’s fiduciary requirements apply to the initial and continued selection of the investment options for a plan’s fund lineup and the plan’s service providers.

Reasonableness of plan fees
Plan sponsor fiduciaries may use plan assets to pay plan fees provided, however, that the services for which fees are being paid are necessary for plan operation, are provided under a reasonable arrangement and no more than reasonable compensation is paid by the plan. Effective July 16, 2011, no arrangement will be considered reasonable unless the service provider discloses fees as required by the final regulations under Section 404©.

The Labor Department has set forth guidelines for plan fiduciaries to determine whether fees are reasonable in order to satisfy ERISA’s fiduciary requirements as follows: (1) the plan fiduciary needs to make certain that direct and indirect (revenue sharing) compensation paid to service providers is reasonable, (2) the plan fiduciary needs to obtain sufficient information regarding fees and other compensation received by the provider, and (3) the plan fiduciary needs to engage in an objective process to obtain the necessary information to assess provider qualifications, service quality and the reasonableness of fees taking into account the services provided to the plan.
Plan fiduciaries are prohibited from engaging in a transaction if the fiduciary has an interest in the transaction that may affect the fiduciary’s best judgment.

Investment policy statements
The process of selection and monitoring of a fund lineup in participant-directed plans, including 401(k)s, is commonly set forth in a plan’s investment policy statement. It is not prudent to maintain an investment policy statement without adhering to its guidelines in relation to fund replacements and the payment of plan fees with revenue sharing.

Accordingly, plan sponsors should update their investment policy statements annually with respect to the payment of fees with plan assets, the selection of funds and service providers, and the attributes applied to the investment selection and monitoring process. There are counsel representing plan sponsors, however, that advise against the maintenance of an investment policy statement for fear that the plan sponsor will fail to apply the guidelines set forth therein, thereby creating liability for the plan sponsor.

Plan fiduciary legal landscape
Recent legal decisions underscore the importance of adopting prudent operational-compliance procedures and best-practice governance standards. These cases are premised, in part, on claims against plan fiduciaries that act upon the advice of conflicted non-fiduciary service providers. Relying on the advice of a non-fiduciary is not evidence of procedural or substantive prudence and offers plan sponsors no exculpatory relief.

The Labor Department has announced a plan expense audit Initiative imposing personal liability on corporate executives for failing to monitor the reasonableness of plan fees and expenses. Aggressive enforcement efforts have enabled the collection of tens of millions of dollars of fines resulting from the payment of improper plan expenses and failing to prudently monitor service providers.

The high cost of maintaining a retirement plan has been overshadowed by the fact that most plan participants were enjoying high investment rates of return. The markets were so strong that few considered the extent to which they were paying fees or paying excessive fees. Plan participants were focused on double-digit returns and exotic investments.

Flat or declining markets, together with industry developments, have resulted in a renewed interest in direct fees, indirect compensation and services. As the challenging economic environment prompts more lawsuits over retirement plan losses, boards of directors, retirement plan committees and other plan fiduciaries responsible for proper plan operation should consider the retention of advisors and attorneys with subject matter expertise to manage conflicts of interest, avoid prohibited transactions and effect compliance with ERISA’s fiduciary-responsibility requirements.

An annual audit process provides monitoring and documentation procedures necessary to ensure best-practices standards of fiduciary governance. The very presence of documentation ensures the quality of fiduciary decisions and reduces litigation risk.
Sheldon M. Geller is a managing member of Stone Hill Fiduciary Management LLC in Great Neck, NY

See-Through 401(k) Fees May Lead to Churn;
Transparency on costs could lead to unbundling, provider switches

By Russ Banham
October 22, 2012
Now that 401(k) retirement plan sponsors are disclosing more about the fees paid to plan providers, will the increased trnsparency cause companies to rethink these relationships? Yes seems to be the prevailing answer.

Two Department of Labor rules that kicked into gear this year require plan providers and companies that sponsor plans to open the books on plan fees and investment costs to the country’s 72 million participants in 401(k) plans.

The information about fees must be easy to read and compare, in plain dollars and cents. The disclosures must include the types of fees paid, what they were for and who received them. Those receiving fees could run the gamut from providers to record keepers, investment firms, consultants, advisers and other third parties, depending on the plan.

Historically, the allocation of 401(k) administrative fees among these parties involved a bundled, revenue-sharing model in which investment fees paid for some administrative expenses. Now that the lid is off on who is getting what, there is a heightened chance some plan sponsors may unbundle the process.

“Due to the increased transparency, we’re hearing more organizations saying, ‘Just unbundle the record-keeping fees,’” says Alison Borland, leader of retirement solutions and strategies at benefits firm Aon Hewitt in Lincolnshire, Ill.

Whether or not the transparency leads to some churn is open to debate.

“I think we may see a bit of provider switching, especially among those organizations that have been with a single provider for a long time,” says Borland, pictured above. “They may have been paying fees as a percentage of [plan] assets, meaning if the assets increased by 30%, they were paying 30% more in fees, even though no additional services were provided. They’re now having an eye-opening experience when they go to market.”

The experience is a positive one, says Joel Shapiro, senior vice president of ERISA compliance at 401(k) Advisors in Aliso Viejo, Calif. “In the past, sponsors that hadn’t hired an adviser or a consulting firm were never really well-versed and directed with regard to fees,” Shapiro explains. “Now they’re getting information in more understandable fashion—information that they should have been receiving from the consultant as an advocate on their behalf with the record keeper.”

Because plan sponsors have a fiduciary duty under ERISA to prudently select and compensate plan providers and other third parties, Shapiro, pictured at left, says the fee transparency “will force a switch in plan sponsors among some providers, and weed out some of the less skillful advisers.” He adds, “Plan sponsors that haven’t gone to market in a long time, if ever, will do some benchmarking to find the best plan from a cost, investment and service standpoint.”

Not everyone agrees. Martin Schmidt, principal at HS2 Solutions, an HR solutions provider in Chicago, says fee disclosure has the potential to be truly transformational at the small end of the market, but predicts much of the same among larger companies.

“Large and jumbo employers have always done the due diligence to be sure they were paying for services that were fair and equitable,” Schmidt says. “While plan sponsors, in their role as fiduciaries, will be giving all this a closer look and are kicking the tires of what’s out there, I don’t see much churn ahead insofar as the providers. The new rules have been a catalyst for fees to decrease anyway.”

Shapiro of 401(k) Advisors also cites downward pressure on fees. “It has been our experience that the additional transparency is leading to more accurate and heightened competition amongst plan service providers, which is resulting in lower administrative fees,” he says, but adds that investment fees are “largely un-impacted.”

Smaller companies, on the other hand, must contend with paid plan advisers who may not be worth their salt. “It’s just been a very inefficient market for small plan providers,” Schmidt explains. “I think we’ll see more advisers go by the wayside, and those that remain morph into the consultant role. A lot of this stuff is still playing itself out.”

With regard to the disclosure rules having an impact on the investments within plans, a survey by Towers Watson shows the average number of investment options in 401(k) plans is decreasing. The portion of employers offering 20 or more investment options fell from 32% in 2010 to 24% this year, with 69% of respondents now offering between 10 and 19 investment options. The study does not indicate what factors are driving the decreases, however.

Shapiro does not expect many plan sponsors to swap one fund for another based entirely on expense. “At least I hope not,” he cautions. “I do see an impact in share classes, however. For instance, a typical mutual fund has various share classes, each with a different expense associated with it. We may see some dialing up or dialing down, depending on the revenue the fund needs to generate to offset the administrative expenses of the plan. For plan sponsors, this promises more flexibility.”

For plan participants, the rules are not a panacea. Employees still must read the fine print to understand their share of expenses. A recent survey of small business owners by ShareBuilder underscores this dilemma, noting that 80% of plan participants who read through the fee disclosures still had questions afterwards.

There’s disclosure and then there’s comprehension—they don’t always go hand in hand.

Can’t Get Your Foot in the Door?

Written by Bill on October 20, 2012 | Filed Under: Uncategorized

Answer Seven Questions & Enter Prospect Firms Under Favorable Conditions

In last week’s blog, I discussed the importance of improving your prospect’s business. Top advisors don’t pitch their products or services. Instead, they constantly focus on the business issues the prospect values. The best advisors become change agents for their clients by bringing to the table new ideas and concepts to increase revenues or lower costs.

This mindset is not easy to achieve. You must subordinate your agenda, park your ego, step back, listen intently, ask smart questions, and engage in a genuine exchange of ideas with prospects on desired outcomes.

Nothing begins, however, until you’ve done your research.

To lay the groundwork for solid research on your target prospect, ask yourself these seven questions. And as you do, you’ll simultaneously begin to identify how you can improve their business.

  1. What do you know about the prospect’s industry, competitors, business model and challenges that, if solved, could make a significant difference?
  2. What issues is the prospect currently dealing with?
  3. What strategic initiatives is the prospect focused on now?
  4. What solutions do you offer to improve their situation, and positively impact their business?
  5. How does the company deal with issues relative to your products or services?
  6. Do you have clients with similar issues to point to as solved?
  7. What solutions did she review before moving forward?

Because everything we do at PleinAire simplifies the complex sale, we’ve tested and proven our questioning approach time and again. When you drill down this way, you tap an underground spring filled with natural flow and sustainable action. When you ask better questions, you get better answers, and learn to think like a trusted advisor or consultant, not a salesman.

Keep the Change. Ever wondered why a hot prospect suddenly goes cold? More than likely, it was your initial approach. Until prospects clearly understand that change will bring a positive impact, they won’t commit to change. People hate change. Here’s where you need to find your inner psychologist. Resistance to change shows up in five common behaviors, with partial credit to Psychologist Eve Ash, a prolific writer on psychology of resistance.

Old Habits. It’s been said that it takes 21 days to form a habit, but six months to change an attitude. Old habits die hard because they provide comfort, structure, familiarity. Learn your prospect’s habit profile. Observe. Intuit. Strategize.

No Control. Change can mean loss of control, gripped in fear, anxiety and stress. We look for certainty in an uncertain world. Liberate yourself. Perhaps, the ultimate control comes from knowledge and acceptance we’ve no control over another’s reaction.

Worn Out. As a nation, we’re tired. The workplace has been under siege for nearly five years. Respect that your prospect doesn’t want any more upheaval. Bring down his anxiety, and help him believe the situation can improve. Reassure.

Insecurity. In complex sales, we run into multi-dimensional decision teams. If a member of team makes a wrong decision, takes too big a risk, or causes any kind of loss, his or her job may be on the line. Do your best to ferret out the CYA blockers (Cover Your Anterior) feed them reassurance.

Loss. Fear of loss stalks our reptilian brains daily. Do your best to preempt your prospect’s fear with a risk management analysis. Walk decision makers through the pros and cons of solution risk—with directness, honesty and authenticity.

To overcome resistance, quantify the difference your solution brings. Do the calculations, give them the data. Show how you’ve helped others. At first contact, explain your value loud and clear. Don’t use your canned pitch book or company brochure. If you lead with benefit plans or financial solutions, don’t be surprised to end up stuck in purchasing or human resources.

A case study from my book MERGE illustrates:
A few years ago, I approached a large retail chain. I did my research: the chain was a perfect candidate for my funding solution for their nonqualified plan. I learned its existing plan from public information, and downloaded documents. I identified six areas of potential improvement in their plan design, and a cost-saving strategy of several million dollars with my solution.

But I knew I’d be up against status quo: “We’re-fine,-don’t-need-to-make-a-change.” Anyway, whatever I offered, the chain would go direct to its incumbent who’d deconstruct my solution to his advantage.

In the CEO’s letter to shareholders, he declared a key initiative to grow store locations by 150 in five years. I dug deeper. The chain had a turnover issue with store managers. Armed with questions, and strong research data, I secured an initial meeting. I planned to ask: “Where will the management talent come from to manage these stores?” “What programs are you currently using or considering to attract and retain these managers?”

In the meeting, I verified turnover was a serious issue. We discussed what cost saving the company could realize with a reasonable 20 percent reduction in turnover. My team reviewed and shared peer research on his competitors.

During our collaboration, we designed a retention bonus plan, deferred into the chain’s plan, which provided the platform to launch our six improvements and cost savings to fund the bonuses. Through this interaction, I built the creditability of a trusted advisor.

DC plan participants don't understand risks and allocations

By Robert Steyer </staff/rsteyer>  | October 15, 2012
Missing: Seth Masters said participants don't seem to understand the goal of target-date funds.

Many defined contribution plan participants areinvesting without fully understanding investment option risks and asset allocation strategies, while not paying much attention to education tools offered by sponsors, new surveys show.

AB found that participants are increasing their investments in target-date funds and expressing greater satisfaction with these choices. At the same time, however, many aren't sure what target-date funds do or how they work.

A Towers Watson & Co. survey of DC plan executives revealed that few participants make good use of their employers' retirement/investment planning resources or make informed decisions regarding their retirement savings.

The surveys expressed optimism about increased participation tempered by frustration about participants failing to take full advantage of their opportunities.

“As much as you try to educate and disclose, there's a lack of understanding,” said Joseph Healy, a senior vice president at AllianceBernstein in New York.

“Employers feel they have given employees the tools, but that they don't use them,” said Robyn Credico, defined contribution practice leader for Towers Watson in Arlington, Va.

Consultants, providers and plan executives have long bemoaned participants' lack of interest in and understanding of building a foundation for retirement. Taken together, these surveys illustrate, at least for target-date funds, that participants are well-intentioned — investing in a diversified portfolio while reducing risk as they grow older — even if they're not well-informed.

The two surveys by AllianceBernstein, to be released Oct. 15, reveal that one-third of participants don't understand that target-date funds become more conservative as investors get closer to retirement. Of that figure, 13% answered incorrectly when asked about a glidepath and 20% responded “don't know.”

When presented with the statement that target-date investment balances are “guaranteed never to go down,” 34% incorrectly said the statement was true and 23% said they didn't know.

And when asked to comment about the claim that target-date funds “guarantee that you will meet your income needs in retirement,” 37% incorrectly answered “true” and 22% said they didn't know.

'Seeing a disconnect'
“We're seeing a disconnect in certain areas,” said Seth Masters, chief investment officer of the firm's defined contribution business. He noted most participants are becoming more satisfied with target-date funds even if they misunderstand the goals.

AllianceBernstein conducted two online surveys with national samples of 1,018 DC plan executives and 1,002 defined contribution plan participants.

Among “active” investors, 49% were more satisfied with target-date funds vs. other investment options in their DC plans, and 38% were equally satisfied with both, Mr. Masters said.

That combined 87% rate was up from 75% three years ago. (His firm defines “active” investors as those who enjoy investing and are more confident in investing.)

Among “accidental” investors, 28% were more satisfied and 44% were equally satisfied with target-date funds vs. other investment options, for a combined satisfaction rate of 72%.

Three years ago, the combined satisfaction percentage was 50%. ( AllianceBernstein describes “accidental” investors as being less confident and more reluctant to invest and save.)

The increased satisfaction for both types of investors is in step with increased investing in target-date funds. AllianceBernstein found that 39% of active investors put money in target-date funds in 2012 vs. 29% in 2009 and 22% in 2005, the first year AllianceBernstein conducted the survey.
Among accidental investors, the percentage investing in target-date funds rose to 27% in 2012 vs. 21% in 2009 and 16% in 2005.
The Towers Watson survey, released Oct. 4, noted that defined contribution plan executives believe many participants are ignoring financial education information, even though 65% said they have provided adequate retirement/investment planning resources.

Only 9% of DC plan executives said employees have a retirement goal, and only 15% believe “a majority of employees make good use of available retirement/investment planning resources,” according to the survey.

In addition, 22% said employees “generally make informed decisions regarding their total retirement savings,” and 26% said employees have “realistic expectations of what (the employer's) primary DC plan can provide.”

Both AllianceBernstein and Towers Watson addressed the issue of DC plans incorporating lifetime income options, and both got mixed signals from participants and plan executives.

When AllianceBernstein identified nine DC plan features and asked which was most important, 67% of participants cited a “steady stream of income in retirement.” The next biggest responses were protection of principal (47%) and the ability to withdraw all or part of an account without fees or penalties (41%). Respondents could offer more than one choice.

( AllianceBernstein markets to DC plans a guaranteed lifetime withdrawal benefit through a target-date portfolio.)

Lack of demand
In the Towers Watson survey, DC plan executives said the biggest reason for not offering a lifetime income option was lack of participant demand (60%), administrative complexity (49%) and fiduciary risk (34%). Executives could offer more than one reason.
In the AllianceBernstein surveys, 16% of plan executives said adding a guaranteed-income target-date fund would be one of the changes they would make in the next two years.

The Towers Watson survey said only 6% of DC plans now offer a guaranteed lifetime income distribution in their DC plans. Usage isn't very strong: Four-fifths of these plans report that fewer than 5% of participants choose this option.

The Towers Watson online survey was based on responses from 371 401(k) executives in plans with more than $10 million in assets and more than 1,000 employees.