Investing November 18, 2020

Retirement Plan Investors May Be Looking for Investment Standouts

While asset managers are optimistic that market conditions will stabilize and improve, they still point to strategies investors can consider in the current environment.
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Art by Gizem Vural

With interest rates at historic lows, and given the extreme market volatility that has continued since March, retirement plan investors may be wondering where to invest their savings.

Investment managers, for the most part, say participants should continue to focus on the long term and have faith that valuations will increase. However, they do point to certain areas of the stock and fixed income markets that show promise.

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As far as remaining faithful in investing is concerned, Rich Weiss, multi-asset strategies chief investment officer (CIO), American Century, says, “If you look at the history of the U.S. financial markets, even at the most frightening times, stocks have eked out 10% or more for most decades, so I am not so concerned about the longer term. At almost any period in history, investors have thought it is difficult to eke out returns in stocks and bonds, and this time is no different.”

That said, Weiss and other asset managers say there are investing and financial planning strategies that retirement plan investors should consider right now.

American Century had been recommending being overweight in growth stocks, such as technology, discretionary stocks and health care, Weiss says. “Two months ago, we, fortunately, took a more neutral position between growth and value and picked up or created an overweight in some of the value-oriented sectors, like REITs [real estate investment trusts]. Looking ahead, we are likely to invest in real estate, financials, cyclical industrials.”

On the fixed income side of the equation, with interest rates staying near zero, and the fear that returns could even be negative, Dan Keady, chief financial planning strategist at TIAA, says, “Investors could move up the ladder of risk, away from high-quality bonds to lower quality bonds to increase the yield. The trade-off, of course, is market volatility. Lower quality bonds trade more like stocks, but some people are willing to take that trade-off.”

Weiss says it also makes sense to diversify the fixed income portion of a portfolio geographically into emerging bond markets. “That way, you get a diversification of monetary policies and foreign exchange diversification, as well,” Weiss says.

“In addition, in many of our fixed income portfolios, we have ventured out into munis [municipal bonds], even though they may be taxable,” Weiss says. “Normally, they yield less than Treasuries, but, in this atypical environment, they are actually yielding more.”

It is also paramount for participants to have a truly diversified portfolio, Keady says.

Weiss says he likes to quote from the Bible’s Ecclesiastes: “Invest in seven ventures, yes, in eight. You do not know what disaster may come upon the land.”

For those approaching retirement, Matt Sommer, senior managing director of the retirement strategy group at Janus Henderson, says it is important for them to have enough cash on hand to live on for two years so that they could ride out a market downturn.

In line with that, Keady says that in a low-interest rate environment, financial planning becomes even more important. He also says people should delay starting their Social Security benefits past the first year of eligibility, 62, as long as possible, and, ideally, until age 70, because delaying benefits increases them by 8% every year.

In addition to this, he says he believes participants whose employer offers both a Roth and a traditional defined contribution (DC) plan should consider splitting their deferrals among the two in order to diversify their taxes in retirement.

Sommer adds that no matter how challenging the stock market might seem at any given time, dollar-cost-averaging pays off over the long term, and, with many plans, participants can benefit from a company match.

The bottom line, the asset managers say, is that despite the seemingly overwhelming challenges in the stock market earlier this year and the current interest rate environment, there are always bright spots and rewards for those who stay the course.

Administration November 17, 2020

The Difference Between Fee-Based and Fee-Only Advisers

It’s important to know how advisers get paid, as well as whether those sources of income could cause a problem for retirement plan sponsors or participants.
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When evaluating or benchmarking retirement plan advisers, it is important to know how they get paid. Plan sponsors may see terms like “fee-only” adviser or “fee-based” adviser and not know what exactly they mean.

The difference between fee-only and fee-based advisers is that fee-only advisers only get one type of fee that is paid either by the plan, plan sponsor or participant, says Josh Sailar, partner at Blue Zone Wealth Advisors. The fee is either a percentage of assets under management (AUM) or a flat fee. “The fee is very transparent and listed very clearly in agreements between the adviser and plan sponsors or participants,” he says.

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A fee-based adviser gets more than one type of fee. “He could be taking a percentage of AUM or a flat fee, but he also could be getting compensated from other avenues,” Sailar says. “The main additional fee type in retirement plans is a 12b-1 fee, which is a sales commission paid annually for using specific investment types or products from a specific investment company.” He explains that 12b-1 fees vary based on the funds used. Investment companies charge an expense ratio for funds used and pay a part of what they collect to fee-based advisers for recommending the funds.

Tom Burmeister, vice president of financial planning at Advicent, says plan sponsors could also think of fee-only advisers as only earning money through fees clients pay. He says fee-only advisers most commonly charge a percentage-of-assets fee. They could get performance-based fees as well. If they get money from any other entity, they are not fee-only advisers, he says.

Fee-based advisers get fees from clients, but they also make money in other ways, Burmeister explains. They could get brokerage commissions if they are acting as a broker/dealer (B/D), insurance commissions or commissions from mutual funds. Their fees could also include revenue sharing from mutual fund companies or retirement plan recordkeepers and even finder’s fees. He says finder’s fees are paid for bringing plan sponsors to a particular recordkeeper.

It’s these indirect payments—revenue sharing or finder’s fees—that are causing some plan sponsors to look at conflicts of interest, Burmeister says. “I have seen research that’s indicated that plan sponsors are increasingly scrutinizing fees and asking for more transparency,” he says. “Many that have been complacent are now benchmarking fees to make sure they are paying a competitive rate, and some are making a transition to fee-only advisers.”

Sailar says there’s more of a chance for a conflict of interest with a fee-based adviser. “It’s an inherent moral hazard,” he says. “The mutual funds these advisers recommend are not necessarily bad—it’s just that the adviser is not going to have an interest in looking elsewhere, so the funds might not necessarily be the best funds for the plan.”

Burmeister says it is possible that a conflict of interest could come up with a fee-only adviser, but, in this case, if there are any potential conflicts, or if an adviser is shifting from fee-only to fee-based compensation, that has to be documented and signed by the client and the adviser. “This is foundational to being a fiduciary,” he says. “Plan sponsors can only get fiduciary status from a fee-only, not a fee-based adviser.”

Some retirement plan litigation has included claims that asset-based fees are unfair, but this is usually related to recordkeeping charges, not adviser fees. Plaintiffs in these suits argue that no more work is done as assets in the plan increase, so an asset-based fee is not justified.

Sailar says since the advisory industry has an asset-based mindset, an adviser might even think about AUM when setting a flat fee. He also says some clients understand asset-based fees better than flat fees and vice versa. Sailar argues that even flat fees increase with inflation—just like a salary increases—“so I don’t think there’s anything inherently wrong [with an asset-based fee] or a conflict of interest, as long as the fees are disclosed.”

He adds, “When you think about it, part of a retirement plan adviser’s job is to get participants to enroll in the plan and save more so they can improve their retirement readiness. That’s where the value comes from. And, if advisers can cut costs in other ways to save participants money, asset-based fees wouldn’t be a problem.”

Burmeister says asset-based fee fairness depends on how active advisers are. “More plan sponsors are looking for advisers who spend time with participants. If participants are getting the benefit of a responsible and proactive adviser working with them, there’s an argument to be made that the adviser deserves to be paid based on the assets growing,” he says. “If adviser is more hands off—just doing broad investment selection and things are more on autopilot—I could see the argument that there’s not a lot to be compensated for if assets grow.”

Across the industry, asset-based fees are going to be the primary way to charge for investment advice for a while, Burmeister says. However, he says he is seeing more fee models introduced, such as hourly or plan-based compensation.

Sailar says he would recommend that plan sponsors use fee-only advisers. “I can’t find a valid reason, especially in retirement plans where there’s a long time horizon, to pay more for funds,” he says. “There are so many low-cost products out there—it’s not rocket science—so why get overpaid to do this?”

Sailar adds that he thinks larger companies that can afford to do so might want to consider hiring a fee-only adviser who charges a flat fee to do one-on-one retirement planning with participants. “Not overly specific retirement planning, but planning so that participants understand the pieces of the puzzle,” he says. “That’s the value add going forward. I think we will see more of that and will see more people with appropriate savings levels.”

“In general, plan sponsors are better off with fee-only advisers since there is less chance for conflicts,” Burmeister says. “There are good fee-based advisers, but a fiduciary approach is the best way to make sure adviser recommendations are aligned with the plan’s and participants’ best interests.”

He adds that studies show that plans offer better participant outcomes if advisers spend time with participants. Participants will know more about how to save and invest. Advisers can also provide administrative help with forms, procedures or disclosures, and they can be there to answer questions or help solve problems.

Burmeister says having someone experienced, with knowledge about the Employee Retirement Income Security Act (ERISA), is beneficial. There are some specific designations advisers can earn related to employer-sponsored retirement plans that are indicators of knowledge, he adds, such as Qualified Plan Financial Consultant (QPFC), Qualified Plan Fiduciary Advisor (QPFA) and Chartered Retirement Plan Specialist (CRPS), to name a few. “These are things to keep an eye out for when evaluating advisers,” Burmeister says.

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