Brooke’s Note: Deep in the article, Rick Meigs makes an interesting point — that getting any useful thoughts out of plan sponsors about their 401(k) plans is quite a trick. You can see why. These are managing partners at law firms, owners of self-storage centers or principals of roofing companies. The people experiencing — and let’s face it, paying for — the plans are legal secretaries, property managers and guys who staple tar paper to plywood. So it’s a little like if Purina called me to ask how my dog, Shadow, likes his kibble. He loves it! He also eats gum off sidewalks. Still, I believe that Fidelity can be heartily commended for this study. The company is the king of the 401(k) business and so any adverse findings are at least a minor self-indictment. It suggests that they’d rather get the news from a survey of their own sponsorship and make proper adjustments than get the bad news in the form of those roofers voting with their feet — a sign of healthy introspection and industry leadership.
The 401(k) industry is experiencing a crunch as plan sponsors scream for more service and bargain harder on fees — a toxic combination for providers but one that bodes well for advisors who really know their 401(k) stuff.
This sweet and sour appraisal comes from a variety of industry sources in the wake of Fidelity’s fourth annual Plan Sponsor Attitudes Survey that this year quizzed 937 plan sponsors from a wide range of plans (not just Fidelity’s) with between 25 to and 10,000 participants.
It found that 62% of plan sponsors are happy with their advisor, up 2 percentage points from 2012. What it also found was that 38% of plan sponsors are unhappy, and of that group, 10% are looking for a new 401(k) advisor. See: Fidelity, Vanguard and Schwab have top 401(k) brands but plan sponsors like the service of off-brands better, study shows.
Fidelity says that 60% of the $1.7 trillion is assets the firm manages are retirement assets. But the firm also provides record-keeping services for 20,000 plans with a cumulative12.6 million participants as of March 31. See: Fidelity reports 57% boost in 401(k) sales as it sets its sights on smaller plans and advisors.
Of those 937 plan sponsors surveyed online, 84% used an advisor, up 9 percentage points from 2012, and the top reasons for doing so are that they need help with plan investments, want a better understanding of how well the plan is working for employees, are concerned with their fiduciary responsibilities and have less time to devote to the plan.
Definition of 'expert’ is tough
This type of research — that penetrates the sometimes impenetrable plan sponsor mindset — is very important to advisors, says Jordan Burgess, who heads up defined-contribution investment-only sales for Fidelity. While he says it is true that plan sponsors have tough and escalating demands, he feels that advisors are up to the challenge.
“This information has been well-received by advisors,” Burgess says. “The advisors use this information and we share this to help them with their due diligence. One of the key messages is that plan sponsors are turning to advisors and are satisfied with the work the advisor is doing. But the expectations they have for advisors continues to ratchet up.”
What is ratcheting up expectations? New pressures being heaped on plan sponsors by regulators on one hand and their employees on the other.
One good example was the case of Ian Ayres, a professor at Yale University, sending out letters to 6,000 plan sponsors warning them of steep fees. See: 401(k) industry flummoxed over Yale professor’s 6,000 'threatening’ letters to plan sponsors.
Fidelity recently tipped its hand about how it plans to react to these kinds of research findings that point to a crunch: by more heavily aligning itself with financial advisors — and in particular the RIAs that use it as a custodian. See: Fidelity sees potential 401(k) rollover magnet for RIAs: retirement income plans.
The Charles Schwab Corp., too, recently made an overt move related to RIAs and 401(k) plans in moving its 150 third-party- administrator custody clients into the same grouping as RIAs — because these two businesses more and more often overlap, based on comments made by Bernie Clark, head of RIA custody at Schwab Advisor Services Wall Street analysts. Combined TPA and RIA assets at Schwab are $900 billion.
“We think that’s important because we’re seeing a lot of synergies serving the high-net-worth market and what’s going on in the small- plan retirement space,” he said on the July call.
The Fidelity study shows that plan sponsors are seeking a “knowledgeable advisor” and they define that person as someone who can keep them informed on regulatory changes, consult with the plan sponsor on how to manage fiduciary responsibilities and risk, offer consultation on plan design, offer proactive suggestions for improving plan performance, help minimize costs, offer fresh insight on participant trends and behavior, and help elect and monitor investment options for their plans.
Bing Waldert, director of Cerulli Associates Inc.,says that this survey confirms the fact that the days that those wealth management advisors can hang on to a handful of retirement plans are certainly numbered.
“With the increased awareness, it’s going to be much harder to advisors who only have a few 401(k) plans to hold on to those plans,” he says. “I think we’re really seeing business swing toward the specialist advisor and the advisor who really focuses on the DC space.”
But Waldert points out that even the retirement specialist has limitations. Many of them work closely on plan design but still aren’t necessarily able to offer one-on-one participant advice.
Even the best RIA retirement specialists may not be able to offer every one of those services — particularly helping participants, he says,
“There’s a lot of pressure going to a small, select group of advisors,” Waldert says. “Plan sponsors want them doing all of these one-on-one meetings with participants and they can’t necessarily do it.” These advisors still aren’t equipped to go after every forklift operator at a plant, asking them to join a plan or increase their referral. The advisor isn’t set up to conduct 1,000 one-on-one meetings.” See: An X-ray of one affluent, educated and sophisticated investor’s portfolio shows how it was chewed up by fees.
Burgess says that Fidelity is trying to help with the issue of costs by introducing a new retirement share class on 16 Fidelity Advisor equity funds. This new class, Class Z, is designed for employer-sponsored plans and will cost about 15 to 20 basis points lower than the advisor funds’ institutional class.
“We’re working on product and pricing and have made a real commitment to have the right type of expertise on our staff and a number of people in the field,” Burgess says. “We’ve got a dedicated team of personnel in advisor marketplace and dedicated team to work with institutional marketplace, and we’re really excited about a number of resources.”
He points out that plan sponsors don’t simply want an advisor with a baseline knowledge of retirement plans, they are demanding someone who can help them with every aspect of the retirement plan.
“The messages we’ve sent to advisors is, you’ve got to make sure you’re an expert and that you’re the more knowledgeable advisor defined across a pretty broad topic and helping them manage their fiduciary duty,” he says. See: Cerulli report: Specialized RIAs likely to win middle-market 401(k) plan battle.
The Fidelity study shows that plan sponsors are aware of fees, but have many more demands than just reasonable fees. In fact, industry leaders question how realistic plan sponsors are in their demands — saying it is difficult to find true RIA retirement specialists who offer every one of these services.
Craig Watanabe, an advisor with Penniall & Associates Inc., says the plan sponsors’ insights in the Fidelity survey aren’t surprising to him. He says even though plan sponsors’ have a lot of demands, his firm tries to offer all types of services — including bulletins that keep clients up-to-date on regulatory changes and annual reviews that cover fiduciary best practices.
“Plan design is addressed on an as-needed basis or with the triannual vendor search. Monitoring plan performance is done quarterly with reports that have become standard within the industry. Keeping plan costs in line is done annually when the plan is benchmarked, Watanabe says.”
Calling participants’ bluff
He agrees that participant advice is “very labor intensive.” Though his firm still offers it to participants, less than 10% actually take advantage of it.
“Because one-on-one services are costly and labor intensive most retirement advisers opt for group meetings or online services. However, we feel one-on-one is by far the most effective way to increase participation and contribution rates. Because our cost to deliver services is high we typically don’t compete on price,” he says.
Rick Meigs, founder and president of 401khelpcenter.com LLC, says that getting a glimpse inside plan sponsors’ thoughts is like the holy grail in the 401(k) industry, as most don’t often share them candidly.
“Fidelity is really trying to find out what plan sponsors are thinking without the results being skewed,” Meigs says. “They’re really trying to give you some reasonable attitudes. Trying to get plan sponsors’ attitudes is very difficult.”
He says that Fidelity’s analysis pokes some holes directly at long-held industry beliefs. For instance, he says that most people believe that about one in 1 in 5 plan sponsors are looking for a new plan. This study shows that 10% are looking to make a change.
“The old rule of thumb was also 20% and they’ve only got 10% looking,” Meigs says. “That doesn’t sound so bad, but if 38% aren’t satisfied, that means they’re vulnerable. If I’m an advisor, I’d be concerned about the 38%, and I’d look at it as an opportunity for prospecting and also make sure that none of my clients are part of that 38%. If I find those 38%, then maybe I can convince them to turn into the 10% who want to switch.”
But, he says the 38% of plan sponsors who are unhappy should be the clients that advisors are going after.
“If I’m an advisor” Meigs adds, “I’m looking at weaknesses in the overall advisory model.This study would help me identify some weaknesses of other advisors and also help me understand if I’m guilty of not addressing certain topics as well.”
Gotten a lot tougher
Meigs also thinks that RIAs in the retirement arena have a tough job ahead of them.
“A lot of RIAs deal with the 401(k) plan menu [and] make changes as appropriate. But they don’t want to deal with plan designs and they don’t want to deal with participants and they don’t want to educate plan sponsors on fiduciary issues. They’re into it for the investment side of it. But that’s not what plan sponsors want. They want more, but they don’t want to pay any more. They want to pay less. [Advisors have] got to do more for the same amount or less.”