Gap Between Workplace and Retail Retirement Advice Can Be Narrowed

A study finds retail retirement planning advice often offers more information to retirement plan participants, but retirement plan sponsors can increase their offerings to narrow the gap.

Retirement planning advice in the workplace often focuses on the retirement plan offering by the plan sponsors—a 401(k), 403(b), defined benefit plan, etc. and the investments choices in defined contribution (DC) plans.

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It’s what the majority of traditional, middle-wage earners utilize for the bulk of their retirement planning and savings, those who will typically lack the resources or knowledge when navigating financial advice, says Nathan Trotman, area vice president at Gallagher, a retirement plan consulting company in Illinois. He says, typically, it’s the highly-compensated employees who seek more outside advice.

However, in the Internet age and with the rise in the number of “robo-advisers,” employees at all wage levels are turning to outside help for retirement planning. They often get more information from retail advice—not just how to use what is offered by the employer-sponsored retirement plan or the providers of those plans.

A study shows retail advice promotes higher savings than in the workplace environment. A recent Hearts & Wallets survey found retail advice more likely considers financial and wellness goals, and investments like taxable brokerage accounts, contributory IRAs (individual retirement accounts) and rollover IRAs. Workplace advice, in contrast, will typically focus on DC retirement plan and third-party resources, including tax and Social Security optimizers and calculators.

Retail investment opportunities allow individuals to be in complete control of their finances, says Laura Varas, president and CEO of Hearts & Wallets. This is especially true for Millennials, as more are opting to invest in taxable brokerage accounts, she says. Instead of consistently pushing the employer-sponsored DC plan like many workplace environments do, retail advice concentrates on retirement savings and investing in an individual’s fund choosing, such as the growing environmental, social and governance (ESG) exchange-traded funds (ETFs), Varas adds.

“People should have a variety of account types. That’s the behavior that we see that leads to success. Successful savers save some in the retirement accounts, and save some in their brokerage,” she says.

Still, workforce advice can make the idea of retirement planning less daunting, as participants are given the tools—and advisers—to navigate their savings. Plus, any advice is good advice, as Trotman says, especially for confused, and even unwilling, retirement plan participants.

“Studies have shown that the more advice people get, the more apt they are to save and the better position they’ll be when they retire,” he notes. The workplace for those people are great, because it provides advice in some cases at no-cost or at an expense already built into the cost they’re paying for their retirement plan.

Improving workplace retirement planning advice

How can employees get more retirement planning advice from the workplace? Enforce mandatory financial education sessions, Trotman answers. While there are companies striving to be paternalistic with their employees, others are only adding tools needed to get by with offering something akin to advice to employees. Financial education can meet employees basic and more complex needs, and makes them more likely to engage in their finances.

“While you don’t need to require everybody to come to every meeting, it’s important that employees have to attend a retirement planning seminar and/or have to attend some sort of financial education meeting,” he says.

Varas agrees, adding a three-task solution to recovering workplace savings advice. The first is understanding the needs of employee’s, which can sometimes mean focusing on achieving short-term financial goals rather than retirement savings. This can range from education planning, getting out of debt, or saving to buy a home. The plan sponsor should ask, “What do employees need, and how should I lay out the tools in front of them?” 

Secondly, Varas suggests naming these advice and guidance experiences. Similar to how we all know the names of our cars and cellphones, participants should understand what their financial planning options in the workplace are, and how to describe them. “Plan sponsors could do a better job at explaining why they are offering employees these services,” she says.

And lastly, Varas suggests plan sponsors explain the economics behind the financial planning programs. If a product, such as a service or tool, is given to a plan sponsor by a DC plan provider at no cost, participants should know why that is so. This builds a trust between participants and plan sponsors, while creating transparency, and stresses the importance the plan sponsor places on retirement planning.

While workplace retirement planning advice does encourage and push participants to engage in their savings and investing, Trotman says it should not cross the line into too much advice. It should not go so far as to allow the participant to go from driving their own retirement planning to sitting back and letting an adviser, DC plan provider or the plan sponsor steer the wheel.

Varas says, “I think the best practice here is for plan sponsors to think about where workplace retirement planning advice should stop. Workplace advice can take employees to a point, and from there, if more is needed, an employee can contract a service on his own.”

Don’t Let 3(38) Fiduciary Confusion Entangle Your Plan

Plan sponsors must take as much time as necessary to understand what it means to hire a 3(38) discretionary investment manager; setting clear goals and expectations is critical.

According to Curcio Web Chief Compliance Officer and Consultant Elliot Raff, it doesn’t happen very often that a plan sponsor decides to go down the 3(38) investment outsourcing route and totally misunderstands what they are signing up for in terms of handing over fund menu discretion.

“However, there are occasionally some misunderstandings about the nitty-gritty details, which can be unsettling for plan sponsors,” says Raff, whose firm acts as a matchmaker between fiduciary investment advisers and retirement plan sponsors.

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Besides consulting with plan sponsors, a big part of Curcio Web’s business involves tracking the work of retirement plan advisers and other entities that provide Employee Retirement Income Security Act (ERISA) Section 3(38) outsourced fiduciary investment management services. Raff says providers in this space are constantly reevaluating their service models, and so plan sponsors may benefit from conducting a review of potential services providers. 

Phil Edwards, principal of Curcio Webb, explains that many of his firm’s clients are investigating 3(38) service providers because they lack internal expertise or sufficient time to allow staff to do the hard work of retirement plan investment monitoring.

“The biggest issue we hear about from our plan sponsor clients is the resource issue,” Raff agrees. “They need to free up time to allow staff to focus on the business.”

When it comes to helping plan sponsors make the most of 3(38) relationships, Raff and Edwards say setting goals and expectations up front is of paramount importance.

“One of our first questions for plan sponsors considering hiring an outsourced investment fiduciary is, what is the objective here?” Raff says. “What ideal outcomes are we managing to? This is important for defined contribution plans, but it is especially important for pension plans that are bringing in an outsourced chief investment officer. For example, when you have a pension plan sponsor that is leveraged and has constrained cash flows, they simply can’t afford to have a big bump in required contributions due to a downturn in the market. This is the sort of thing that should be articulated at the start of a 3(38) relationship.”

Raff and Edwards say plan sponsors must take as much time as necessary to understand these issues. Some questions to explore ahead of a 3(38) review process include the following: What functions does the sponsor want to hold onto? What functions is the company comfortable handing over? And what functions does the sponsor really want to get rid of?

“This is the line of questions that should drive and define a well-documented delegation of duties,” Raff adds. “You need to start thinking about the specifics at the earliest stage of the process. I think some companies may be thinking about jumping on the outsourcing bandwagon without really understanding why or what it means.  They hear about outsourcing as a way to reduce their liability and the amount of time they spend on the plan. But we know it’s much more than that.”

“We should clarify that these are not questions that plan sponsors are going to be able to just answer right off the bat if they have not thought about this sort of thing before,” Edwards says. “For plan sponsors just starting out, the RFP process itself can be a part of the learning curve. By the time you will have reviewed all the responding firms, you can get a good foundation for deciding what you want.”

Joe Connell, partner, retirement plan services, at Sikich Financial (and a former winner of a PLANSPONSOR Plan Adviser of the Year designation), says in his many years serving plan sponsors in this capacity, he has not had a lot of experience with clients regretting going down the 3(38) route. He credits this to the fact that he and his clients make it a priority to establish clear ground rules at the outset of the relationship.

Giving up investment selection and monitoring

Plan sponsors need to carefully consider the level of outsourcing they are comfortable with. Some plan sponsors just won’t feel comfortable giving over full investment menu discretion to an outside adviser, and that’s okay. These plans may be a better fit for 3(21) service, wherein the investment process is much more collaborative and discretion remains with the sponsor.

In Connell’s experience, even when a plan sponsor brings on an outside discretionary fiduciary under ERISA Section 3(38), the client is not necessarily trying to remove themselves entirely from all plan-related decisions. Instead the move is more about getting the right expertise in place for the challenging task of investment selection and monitoring, by the same token freeing up time for the plan sponsor to worry about other things.

Scott Matheson, managing director, defined contribution practice leader at CAPTRUST, says plan sponsor demand for 3(38) services continues to grow at a strong pace. According to Matheson, nearly all of the RFPs the firm filled out last year asked about 3(38) capabilities, and many of those asked for 3(38) pricing, even if the intent of the plan sponsor issuing the RFP was the hiring of a 3(21) adviser.

“To the extent we see friction points with plan sponsors accepting a 3(38) engagement, it tends to come during the transition period as plan sponsor employees and/or committee members are settling into their newly evolved roles,” Matheson says. “Much of this, however, can be reduced or avoided by proper expectation setting and by advisers ensuring a good fit for plan sponsors before transitioning them to a 3(38) service model.”

Matheson agrees that plan sponsors that are very interested in the investment selection and monitoring process are likely not good fits to transition to a 3(38) approach and, as such, would likely experience more friction during a transition period. 

Monitoring the 3(38) investment manager

When they engage us as a 3(38) investment manager, clients often ask how they should monitor us,” Matheson observes. “We have a unique perspective in answering this question because, in the course of business, we evaluate and monitor the investment managers whose products are present in our clients’ investment lineups. In fact, we have a dedicated team doing this every day, and the rigor we apply to that process influences how we suggest that you monitor a plan-level investment manager.”

Matheson shares a long list of questions plan sponsors should consider:

  • Has the investment manager acknowledged in writing that it is acting as a plan fiduciary? 
  • Is the investment manager adhering to the plan’s investment policy statement (IPS)?
  • Is the investment manager selecting plan investment options consistent with the plan’s IPS?
  • Is the investment manager monitoring (and replacing, if needed) investment options consistent with the plan’s IPS?
  • Does the investment manager report performance compared to each strategy’s objective, appropriate benchmarks, and peer groups?
  • Does the investment manager provide adequate rationale and documentation for investment changes made?
  • Does the investment manager work with your provider to execute fund changes on your behalf?

Matheson also suggests that plan sponsors, after bringing in a 3(38) provider, periodically ask the investment manager questions about its organization, perhaps annually, to ensure the firm has not changed in a significant way that could impact its ability to fulfill its duties.

When conducting these annual reviews, Matheson says the following questions are relevant:

  • Have there been any changes to the management or ownership of the firm?
  • Have there been any organizational changes to the firm that may impact plan management?
  • Has there been a change to the firm’s status under the Investment Advisers Act of 1940? 
  • Has the firm been the subject of an investigation by any regulatory or government agency?
  • Has the firm been routinely examined by regulators or independent auditors? 
  • Has the firm been the subject of any litigation (settled, pending, or threatened)?
  • Have there been any material changes to the firm’s fidelity bond or errors and omissions insurance?
  • Have there been any changes to the firm’s written fiduciary status related to the plan?
  • Have there been any changes to the firm’s roles and responsibilities related to the plan?
  • Has the firm disclosed all sources of compensation?
  • Does the firm have any conflicts of interest with any of the plan’s investment managers or other providers?
  • What are the investment manager’s 3(38) assets under advisement? 
  • What is the total number of plans for which the investment manager acts as 3(38)?

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