Managed Accounts are More Effective

Recently, Plan Sponsor Magazine published their 2015 PLANSPONSOR Defined Contribution Survey and in it was some very interesting data regarding Managed Accounts and outcomes.  See the full survey here: PLANSPONSOR 2015 Defined Contribution Survey

After reviewing the data, one thing becomes very apparent, plans that use a Managed Account combined with an advisor acting in a fiduciary capacity have better results than plans not using these services.  The article below from planadviser magazine dives into the data a little deeper and focuses on average balances.

Managed Accounts - Plans with Managed Accounts have better outcomes

**WARNING: A little commercial below, apologies, but that stats are what they are.**

These results correlate to my personal experience.  At my firm, Unified Trust, approximately 9 out of every 10 plans we bring on board are choosing to adopt our full suite of recommendations, most of which are maternalistic.   We suggest clients utilize automatic enrollment (starting at 6%), automatic deferral escalators and the UnifiedPLan Managed Account Solution.  When looking at these plans, the results are astounding.

As of the date of this writing, we see roughly 80% of participants stay in the defaulted managed account solution.  This solution provides the participants with the answers AT enrollment to most of their questions.  When can I afford to retire? Am I on track?  What will my monthly income be?  How much of that is from the plan, social security, outside assets and other sources of income?  What should my deferral rate be in order for me to get or stay on track?

Of the participants offered this managed account, we are seeing 71% of those participants on track for a fully funded benefit.  Most industry studies we've reviewed has the industry average at about 25% (lowest I've seen is 15%, highest is 40%).  The system of defaulting participants into a solution that delivers AND implements all of the answers is proven here to be nearly 3 times more effective than traditional methods in delivering the outcome that matters most, retirement readiness.

Whether it is outside studies like PLANSPONSOR's survey, or our first hand experience, I think the results speak for themselves.  The more that we as professionals take on ourselves and do for our clients, the better the results.

-Jason Grantz

Generation Lost: Millenials and how to best serve them regarding Retirement

 A colleague of mine, Lee Topley, forwarded this to me with some interesting thoughts.  I felt it good a good idea to share those here.  Full Disclosure: this post references a service my firm, Unified Trust provides called The UnifiedPlan (UP), a managed account service engineered specifically for 401(k) plans.

A client of ours recently inquired with us about how to communicate to Millennials.  See this linked white paper that was done by BNY Mellon on this group.  Generation Lost: Millennials and Finance Several of their key findings are below, and some thoughts on how we can impact 3 of the 4 summary findings.

Findings:

1. Millennials have little understanding of just how big a task they face in providing for their retirement.  This lack of knowledge is not due to a lack of interest.  Rather they feel they have not been told the reality of their situation.  The UP tells them exactly where they are (they don’t have to ask, we automatically give it to them)…they are in the Green (on track) or in the Red (underfunded)…and how much they have to save to become green if they are red.  Plus, the UP provides all types of flexibility to customize their solution if they want to re-model different scenarios.
2. Most Millennials want financial services providers to be brutally honest with them about the bleak future they will face if they do nothing to build an adequate retirement income.  They want financial service providers to use more shocking messaging and to speak to them in language they understand.  The above response…Red versus Green is pretty frank on a participant's statement.  In addition if we use pointed communications focusing on the impact of greater savings, this would be the direct style that millennials are looking for. 
3. Social Finance has a very strong appeal to Millennials, yet they do not feel that adequate impact oriented investment are accessible.  This is the one area that we aren't totally in sync on.  I wonder about this part of their concern.  Socially Responsible funds could be added, but due to prudence, would not be part of the glide paths.  So we could help here, but will this really help them achieve an adequate benefit at retirement or just make them feel better about how their money is invested?  This is the one finding that I think the UP doesn’t automatically cover. 
4. Millennials feel today’s financial services products are not tailored to their needs.  They want new products to dovetail with the paths their lives are likely to take, not those of their parents.  Later in this paper the findings relate to the ability to access the money for buying a house, an illness, etc., so they may not be completely understanding the tax deferred aspect of their 401(k) money.  However, the plan can be set-up so they have access if the sponsor chooses to do so.

 Shortly after the summary on page 1 it states:

“These findings paint a picture of a generation that is ignorant of financial matters because it is being ignored. It is a generation that wants financial services providers to tell the truth”  A named Plan Fiduciary is bound by law to tell the truth and to always have their best interest as the #1 goal.

I found this dialogue interesting, and maybe gives the reader a little look under the hood at what professional fiduciaries are thinking about when discussing internally how to best serve clients.  

- Jason Grantz

What's a Plan to Do?

“Some sponsors are just starting to think about outcomes, since in the past they thought they needed a retirement plan because that’s part of what it takes to attract employees.  But they had never thought about, ‘Is the plan supposed to do something? And if it is supposed to do something, what is it supposed to do,” said Dr. Gregory Kasten founder and CEO of Unified Trust.

Dr. Kasten was among a few select experts in the field interviewed for the article Retirement Ready-or Not, recently published by NAPA.net.  The article stressed the critical role an advisor plays in helping plan sponsors answer the question, ‘what is a retirement plan supposed to do”? While that question seems simplistic in nature, surprisingly very few sponsors ever think about the true purpose or goal of their retirement plan as it relates to their employees success. Many in the industry measure success in terms of tracking participation and deferral rates, monitoring investment performance, and benchmarking fees all of which are important, but none of which independently provide a complete guide as to whether or not participants are succeeding. At Unified Trust, we believe that success is an employee being able to adequately replace their paycheck when they retire.

We also believe that success doesn’t happen by chance. That’s why Unified Trust developed the ‘benefit policy statement’ which is considered a sister document to the ‘investment policy statement.’  “If you want to manage outcomes, you are going to have to measure outcomes – and go a step further and define the outcomes you want,” said Kasten.

In these times of fee compression where it’s ever so critical to show added value, by helping a plan sponsor deliver improved outcomes for their participants, advisors can differentiate themselves in the marketplace.  As we move into the future, how successful—or unsuccessful— a retirement plan is in delivering retirement security may become a factor in determining whether or not a plan sponsor and other plan fiduciaries are meeting their fiduciary responsibilities.  Having a plan that doesn’t measure up to changing industry standards could leave the fiduciaries open to potential litigation.

 
- Jason

DOL - the 2014 Pipeline!

In case you missed it, recently the DOL published a list of initiatives for 2014.  It was written about in an article from Plan Adviser magazine, linked here.

http://www.planadviser.com/DOL_Issues_2014_Retirement_Plan_Pipeline.aspx

As a summary of this, here are the eight items on the DOL’s published agenda for 2014 that impact ERISA Retirement Plans (as opposed to IRAs, Health Plans, 457 plans or non-ERISA 403(b)s).

1.) Fiduciary Re-Definition – Targeting August 2014 – This will continue to be an argument.  NAPA and ASPPA are against fiduciary standard in its current form, which has (in their opinion) too many exceptions resulting in a “non-uniform, uniform fiduciary standard”.  An article on NAPA.net today indicates that the DOL is lobbying pretty hard to get this done this year.  Time will tell.  Article linked here:

http://www.napa-net.org/news/managing-a-practice/regulatory-compliance/perez-lobbying-congress-on-fiduciary-rule/?id=6661&tkn=940127217506af86e247cd&mqsc=E3713559&utm_source=WhatCountsEmail&utm_medium=NAPA_List+Napa-Net%20Daily&utm_campaign=NAPA%20Net%20Daily

  

2.) Lifetime Income Illustrations – Targeting August 2014 – DOL is still interpreting comments.  Seems like this idea has legs behind it despite some of the obvious deficiencies in the accuracy of calculations.

3.)  Review use of Brokerage Windows in Partic. Directed plans – This could be a big deal, and will be the one that I’m most interested in.  As many of us in the industry know and agree, the use of individual brokerage in plans has a TON of problems, hopefully they’ll make this restrictive enough that they will mainly go away.

a.       Explore whether and to what extent regulatory guidance on fiduciary requirements and safeguards for such arrangements are appropriate (b/c they could be problematic) – RFI expected in April of 2014

4.)  408(b)(2) amendments coming requiring providers to provide a guide to understanding or a similar tool to help sponsors, especially small ones to understand this guidance – notice of proposed rule making (NPRM) in January – Great idea, but I suspect that the tools created will be too difficult for clients to use, or some other such problem so that most providers can continue to hoodwink the clients on what they are truly paying

5.)    Reduction in Safe Harbor afforded to selection of Annuity option in individual account plans to only cover the idea that the provider has the ability to make lifetime payments (not as to quality of annuity or provider) – October 2014

6.)    DB funding notice finalizing – March 2014

7.)    Amendment to Participant Disclosures surrounding Qualifed Default Investment Alternatives and Target Date funds under 404a-5 – looking for more specificity – March 2014 – More written disclosure that will go unread and not understood by participants.  This is a huge waste of energy and resources.

8.)    QTA – Qualified Termination Administrator – Looking to create to deal w. issue of abandoned plans, similar to using a bankruptcy trustee – April 2014 for final rule
 

Trends for 2014, and beyond!

The year is coming to a close and, frankly, while excited for what lies ahead, I'm saddened to see the end of 2013.  2013 proved to be another great year both on a personal and professional level and while I reflect back on all of the success we've been having, I remind myself to be mindful of what lies ahead, 2014! 

As we transition past the legislative issues that have been bogging down the industry (MEP's, Fee Disclosure, fiduciary definition, etc.), the industry finally starts to put service improvement at the forefront.  In this article, published in Employee Benefit News, author Robert Lawton highlights five trends that he seems coming for 2014 and beyond and, candidly, I agree with him!

1.) Simple, simpler, and simply simplify!! - Plans, that is.
2.) More Target Date fund and/or managed account usage for participants.
3.) Focus on outcomes
4.) Retirement Readiness - Seems like tied to #3 to me.
5.) Shift from cost reduction and into monitoring

Below is a link to the complete article.  I hope Mr. Lawton has a perfect Crystal Ball.

http://ebn.benefitnews.com/blog/ebviews/top-5-401k-plan-trends-2014-2738237-1.html

Thanks for 2012 and The Big Five in 2013

To all the readers of this blog, I wanted to say thank you for your previous and continued interest.  2012 was a very important and, frankly, a big year for us.  We've gotten more attention then ever and have more hits per day and then ever before.  Looking forward to continuing the dialogue in 2013 and working with each of you to try and fine ways to better improve the delivery of good Retirement Plan Consulting.  That said, here's what we have to look forward to in 2013 in the Retirement Plan Industry.

1. Threats to DC plan tax incentives coming from two continuing debates on Capitol Hill — over the nation’s debt limit and about tax reform.  This is a very real potential threat that we've discussed previously leading to 'Save My 401k' campaign.  I'm told that 55,000 citizens have submitted letters to their congress people to date and more are doing so every day.  We are getting their attention.

2. Fee disclosure is not over. We expect DOL regulators to look at advisor fees again in 2013, focusing on critical questions about how fees are paid.  This is going to be interesting.  As it unfolds, I expect to see enforcement of last year's 408(b)-2 regulations and my opinion is that Plan Sponsors will be held accountable for compliance leading them to ask a lot of questions to their advisors about advisory fees.  Could get uncomfortable for some.

3. The definition of a fiduciary and what the advisor’s role in that is. Expect to see a proposed rule from DOL in the second quarter of the year.  This debate roles on.  Some of us involved in the industry and with the National Association of Plan Advisors will likely have a chance to weigh in on this issue.

4. Lifetime benefits. We know that this issue is an area of great interest to the DOL. We’re moving toward a requirement in this area; probably by March we’ll see a proposed regulation on providing lifetime income estimates on participant statements.  This is a great idea.  However, there are a lot of great ideas that lead to extremely poor execution.  A great example is the next item.  The idea of a glide path where people start out more aggressively invested and get more conservative as they age is a great idea.  The industry's deliverable on that, the Target Date Mutual Fund, was a poorly executed result (at least from the investors point of view....actually a great deal for those fund companies).

5. Reevaluation of target date funds — in particular, regarding their usage as QDIAs.  I'm crossing my finger's that eyes will be open as to the major flaws that exist with the current availability and structure of these funds and hope that the QDIA definition will eliminate these as an option......

Keep your eyes open, as there will surely be more to come.

Best - Jason

401(k) Advice, Good but only if Used

There was an article in the Wall Street Journal yesterday titled 'Thanks but No Thanks on 401(k) Advice' found here.
http://online.wsj.com/article/SB10001424052970204346104576638933476020932.html

The gist of this article is that more and more 401(k) plans are offering outside help in the form of participant level investment advice, but that uptake on this advice is generally low.

The fact that more plans are giving participants access to advice, in one form or another, is a very good thing or at least it should be. Many surveys show that formal advice leads participants to better decision making and that leads to better outcomes in the form of income replacement rates. However, if only 25% of the people who have access to advice through their retirement plans actually take advantage of it, then this is an issue. My feeling is that many if not most of the advice programs out there are good, very good or great. So why aren't the participants using these services? I have my thoughts.

Firstly, from a behavioral perspective, it has been my experience that many participants would be better described as speculators rather than investors. The key differnce is in expectations. Investors have an expected return on investment (ROI).

Ex.) I invest $10,000 in a 4% bond, I have an expected outcome of 4% interest for the term of the bond and a return of my $10,000 when the bond matures.

Most participants in 401(k) plans do not have an expectation of ROI, rather what they have is hope. I think, in part, this stems from the experience level of most participants as it pertains to investing. The great majority of investment professionals set minimum requirements on who they will look to as potential clients, such as net worth, or minimum investment amounts, e.g. $250,000. Many 401(k) participants would never qualify to work with investment professionals and are ill-equipped to understand the basics of investing, what the experience will be like, what market volatility is and how that will translate to emotional bias' and poor decision-making. Subsequently, the first and perhaps only investing experience they have is with their 401(k) plan and the only reason they get this access is from the aggregation of the asset of the plan.

Next, behaviorally, we've observed that for most participants that savings is a low priority. Most have a set-it forget-it mentality when it comes to decisions they make. For example, they decide to join the plan at a deferral rate of 4%, when we look back at them 3-4 years from now, they are still deferring just 4%. Asset Allocation is a best guess. The simple act of rebalancing, which is additive, doesn't happen in the aggregate. These and other issues lead to the poor income replacement statistics that we've all been seeing.

So, again, how do we take a valuable service like participant advice and get the uptake on it to be higher than the 25% figure in the article?

1.) Remove the price barriers. Not saying that advice should be free, far from it, what I am saying is that if the participant feels they will pay more for advice, they are likely to not take it. Instead, have the fee for advice be a plan-level fee. I.E. 25 basis points to the Plan Sponsor. If the Plan Sponsor chooses to pass along fees to the plan, then everyone pays for it. It becomes a fee neutral decision for the participant to use it or not.

2.) Make advice the default. Like other automatic provisions, usage goes up SUBSTANTIALLY if you make it a plan default. Our experience is that when we make advice programs a plan default we see a usage rate north of 85%.....that's right, 85% or 60% HIGHER than what the Wall Street Journal article says is the industry norm right now.

3.) Change the conversation at the participant level. Give them information in a way that they truly can understand. Most participants are return-centric, not benefit-centric. They look at what the investments did last quarter. In general, as mentioned, most are ill equipped to do anything with performance information, positive or negative. However, if we communicate to them at what age they will be able to afford to retire, give them the REAL number on what that is for a variety of ages, 66, 67, 68, etc. then they will truly know if they are on target to retire with enough income or not. If they are on a shortfall, we can communicate to them the earliest age that they can afford to retire or show them the impact of saving more.....what a novel concept, use the 401(k) Savings Plan as just that, a SAVINGS PLAN!

4.) Use the advantages offered in the Pension Protection Act of 2006. Automate savings, automate escalation, default people to Qualified Default Investment Alternatives, and automate rebalancing.

Those are real, practical solutions that can be implemented easily for many plans and will change the dialogue with Plan Sponsors and participants from investments and fees to something that really matters more which is income replacement rates.

Automatic Savings: A Case Study

Recently, Dan Ariely (author of The Upside of Irrationality) published an article in the Harvard Business Review. In this article, linked at the bottom, he describes a public pension system in the country of Chile that looks very familiar to a mandated version of the provisions the Pension Protection Act of 2006. It seems that Chile subscribes to the notion that if they can remove emotional bias from the equation, the net effect would ultimately be an increase in retirement income adequacy for their citizens.

....In Chile, by law, 11% of every employee’s salary is automatically transferred into a retirement account. Employees select their preferred level of risk, with the following restrictions: They may not choose either 100% equities or 100% bonds, and the percentage of equity that they can select diminishes as they age. When employees reach retirement, their savings are converted into annuities.....

That sounds a lot like Automatic Enrollment and QDIA usage. Good ideas, no doubt. Behaviorally, it recognizes that inertia in decision making regarding money is a very real problem. Forcing the savings and forcing the reduction of risk over time probably seems like a diminishing of freedom in the absence of an opt-out clause. However, in the U.S. over the past 25-30 years, the data on retirement readiness never changes. Participants covered by plans are on a path to failure (inadequate income replacement rates) to the tune of 4-1, that's a rough composite stat, but you get my drift. The article points out that people are not good at two aspects of financial planning for retirement:

1.) deciding to save and
2.) eliminating risk in later years

We think that participants in retirement plans have more challenges thant that. After deciding to save, it is difficult for them to determine how much is truly affordable and how much is truly necessary. Additionally, participants are challenged in general when it comes to investing even with a little (or more) education. Common mistakes range from investing 100% in cash (overwhelmed behavior) to overly aggressive investing (gamblers behavior, aka performance chasing). The Chilean system, however does something very smart. It acknowledges that people who enroll in retirement plans are reasonably good at managing their own risk. So, while the investment choices are left to the individual, the choices are limited exclusively to asset allocation portfolios with a fair degree of diversification.

I think I once heard someone say that the safest plan is one that is 100% invested in QDIAs. Now that was in the context of fiduciary safety, so perhaps not directly applicable, however, the elimination of fear based and gambling based decision making by limiting the options only to models is a terrific idea.

This type of design structure is available in the U.S. today inside of 401(k) Plans. At my firm, we call it The Success Pathway. But unlike in the Chilean system, the participants still will have the freedom to opt out of the plan or any of its auto provisions.

We applaud Chile for taking a strong position on embracing a plan design that shows it leads to better outcomes for the folks it serves.

Please click here to see the full text.

Lifetime Income Disclosure Act, UTC on Track

Recently (specifically, November 2009), the Lifetime Income Disclosure Act was introduced by Senators Jeff Bingaman, Herb Kohl and Johnny Isakson. This bill would require that 401(k) providers inform participants of the monthly income they would expect at retirement. This projection is intended to be modeled after the existing Social Security statements that Americans presently receive annually. The bill is intended to help the average worker to understand their present financial vulnerability. Click here for a copy of the bill.

Obviously, this is a new introduction to the Senate and will be placed on what seems to be a an ever-growing stack of proposed Retirement Plan legislation which may or may not get passed. However, this one is interesting as it supports many notions that we, at Unified Trust, have been talking about for years. Specifically, it mentions that the average American is on path to a substantial shortfall. We usually quote 80% of workers covered do not have adequate retirement savings in today’s dollars. What also is interesting is that this new type of disclosure is aimed at converting consumer (participants) thoughts from the traditional “investment account” approach to a new “benefit account” approach. I.E. Is the 401(k) actually providing me with adequate income replacement?

This is exactly what we are doing with our new service, The unifiedPLAN®. In fact, each participant enrolled in The unifiedPLAN® will be presented with a mathematically sound Success Analysis at the initial enrollment meeting and each quarter thereafter. Click here to view a sample report. This analysis will show them in today’s dollars what their projected surplus or shortfall is and offer suggestions on how to improve the outcome. In addition, based on this projection a custom tailored model portfolio will be established for the participant and adjust automatically as the math changes from quarter to quarter. This established glide path will improve outcomes for virtually all participants.