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Stepping out of the defined contribution 'echo chamber'

Relying on mainstream concepts is becoming dangerous for retirement plan advisers when working with clients

Jun 8, 2017 @ 10:30 am

By Fred Barstein

With the competition among defined contribution plan advisers tough and expected to get even tougher as the Department of Labor fiduciary rule forces inexperienced advisers to exit the market, plan advisers need to step out of the DC "echo chamber" and bring new ideas to clients.

What is the DC echo chamber and how can you exit it?

The echo chamber includes old ideas that might have worked in the past, or ideas that seem logical when promulgated at industry conferences, but are tired and will have little to no impact going forward.

Many advisers have relied on the "Triple Fs" to win and maintain 401(k) and 403(b) plan clients: fees, funds and fiduciary. While this strategy might have worked a decade ago, or even recently for smaller plans, it is dangerous to focus on these areas in the future.

By putting too much focus on fees rather than value, advisers are facing alarmingly rapid declines in fees and opening the door for a competitor to offer "similar" services for less. With more and more assets going into target-date and passive funds, the need by DC plans for investment acumen is diminishing. Finally, there are third parties willing to take on fiduciary responsibility for 3 basis points or less.

Concepts resonating more recently in the DC "echo chamber" are financial wellness and improvement of participant outcomes.

Financial wellness is the new buzzword generating great interest and excitement from plan sponsors. But there is little evidence to show that the employees using financial wellness programs are the ones who actually need it most. In addition, the methods used have been largely ineffective, with little change in behavior realized for all the effort.

Setting up an ideal plan, by using automatic features like auto-enrollment, auto-escalation, stretch matching and professionally managed portfolios like TDFs, has proven to be effective. Because it does not increase plan-sponsor liability or work and keeps costs manageable, many employers are using parts of the ideal plan to make a significant impact on outcomes. But without engagement from senior management in an employer's DC plan, or until advisers can demonstrate how the plan affects an organization's bottom line, significant improvement will be slow to materialize.

Plan sponsors cite investment selection and monitoring, followed by compliance, participant advice, limiting liability, and participant outcomes as the top services advisers provide, according to a joint 2017 survey conducted by The Plan Sponsor University and the National Association of Plan Advisors.

So the question is how to change the conversation with plan sponsors, who have little to no education or training on how to run their DC plan and who have more important priorities looming.

One way to step out of the DC echo chamber is to use language that human resources and corporate managers might understand. That will be more effective than the "Triple Fs." Part of the issue is that plan sponsors aren't sure about the role that plan advisors play, especially in relationship to record keepers and third party administrators, or how to evaluate them.

Why not change the conversation by using the "ELI" rating: ethics, leadership and impact.

If adviser ethics are lacking, either based on legal or regulatory miscues or questionable activities, nothing else really matters. Ethics also includes eliminating conflicts of interest. Leadership includes anticipating the needs of the plan and participant, not just reacting quickly to questions or requests, as well as stepping up in a crisis. And unless the actions of an adviser are impactful, what's the point? (See the point about financial wellness programs.)

The DC industry echo chamber is loud right now with the strident debate over the DOL's fiduciary rule, which plan sponsors hear loud and clear. Although they may not be conversant in ERISA or investment lingo, they are not stupid.

So which sounds better? Advisers who promise to put their clients' interests first, take a leadership role in helping manage the organization's retirement plan and promising to make a positive impact on the plan, the company and the employees? Or one focused on fees, funds and fiduciary?

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.

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