MASTERCLASS: Defined Contribution - September 2018

There’s a lot of talk about the race to zero in the retirement plan industry and its implications for advisors and plan providers. Between vast competition and firms racings on price, what’s at stake? In this Masterclass, three industry experts join to evaluate retirement plan providers and the best way to maximize a retirement plan.

  • Ryan Schwartz, CFA, CFP - Vice President at EP Wealth Advisors

  • Gerald Fegler - Principal at Marin Wealth Advisors

  • Chad Brown - Vice President, Managing Director of Wholesale Distribution at Transamerica

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  • 55 mins 25 secs

Hoda Imam: There’s a lot of talk about the race to zero in the retirement plan industry and its implications for advisors and plan providers.  The competition is rife and as firms race on price, what’s at stake?  We’ll be looking at how to evaluate retirement plan providers and the best way to maximize a retirement plan.  Today I’m joined by three experts who will share their insights from the Nasdaq Entrepreneurial Center in San Francisco.  Welcome to the Defined Contribution Masterclass.  So this is a beast of a topic but unfortunately we only have about an hour to talk about it, so let’s jump right in.  Let’s start off with the population that are approaching retirement right now, baby boomers, what choices are they making when it comes to retirement plans?

Ryan Schwartz: Sure.  I mean I see in my experience the DC plans as being the most prevalent as an advisor and someone that’s working with financial planning with my clients.  We’ll discuss DB plans occasionally, usually that can make sense if they have, you know, a significant amount of cash flow that’s predictable over at least three years and they’re wanting to defer that income from taxation.  You know, that’s why we’ll have that discussion.  But more than anything else in DC plans, if they are super savers, maybe they’re looking at after tax savings options.  I’m seeing more mega backed or Roth options within some of the larger employers.  And so that’s what I’m seeing that’s out there.

Gerald Fegler:  And I would reiterate, we see the same thing with our clientele, most are in DC plans.  We’ve had a few conversations recently with clients where they’re maybe later in their career, maybe they’re between 60 and 70 but they’re still running their business.  And there’s a big discrepancy between what they’re being paid and what their employees are being paid.  So the DB option might make sense, again, to Ryan’s point if there’s sufficient cash flow.  But with baby boomers, I think the biggest thing I see is unfortunately those folks that maybe didn’t save enough or folks that, you know, maybe got hurt in 08 and didn’t get back in.  So those are kind of the two things that I see more, almost more prevalent, like they’ve been participating but they maybe didn’t make the right choices, maybe didn’t have good advice at the time.

Hoda Imam:   And a lot’s changed since 08, so they have a lot of catching up to do.

Gerald Fegler:  Yes.

Chad Brown:  Yeah, the market’s run and from a provider’s perspective, you know, we are seeing advisors like these two gentlemen come to us and say, “What options do you have for the baby boomers to get their money out of the Defined Contribution plan?”  So if they’re in a DB plan, it’s self-explanatory.  You know, it’s set up to pay them lifetime income.  On the Defined Contribution side, for a lot of these folks, that’s become their largest asset, especially for the super savers.  And but there’s really no efficient provisions for those plans to be able to pay those people out efficiently.  But we’ve really from a provider’s perspective historically relied on the rest of the marketplace to provide those solutions, you know, early on, probably 10 years ago there was an effort to create some sort of in plan annuitization.  But really there was very low take rate for that.  And so now we’ve got to the point, to your comment that they’re retiring now and they’re looking for ways to get their money out of the plan, yeah.

Hoda Imam:   And how can employers help employees build or find the right retirement savings plan?

Chad Brown:  Yeah.  I think the important thing is they really should be engaging a consultant, regardless of the size, I mean as a provider we see plans from startup, brand new businesses realizing they’ve got to create some sort of tax saving environment.  In today’s environment as a matter of fact with the way the economy’s been going, we’ve got a, you know, in certain marketplaces you’ve got a lot of business owners saying, “I need to do something to recruit employees.”  The key difference with those is partnering with a good advisor who is advising from a business perspective.  So giving them an idea, not only the tax savings that can be realized from a plan, but more importantly how can be used as a recruitment retention tool and then ultimately using it for what it’s designed to do, which is get people to retire.  And unfortunately over the last decade employee longevity has actually increased, a lot of people are staying and working longer and that doesn’t benefit the business owner ultimately in the long run.

Hoda Imam: And is there a group that’s migrating away from DC plans?

Chad Brown:  We’re not seeing that too much.

Gerald Fegler:  Yeah, we’re not seeing it.  I think the 401(k) or the DC plan has become ubiquitous among almost any employee.  I’d agree with Chad, the idea that that’s a huge recruitment tool for employers has become even more so.  But we’re not seeing anybody moving necessarily away from DC.  But looking for ways that even if it’s a very small business, how do we make that work for us?  And I think there’s, you know, new providers in this space that are making it easier to work in that space, for startup plans that have very, very little capital, you know, that are literally starting off with, you know, that first month’s contribution.  That tends to be where we see an opportunity set for us to help our clients.

Hoda Imam: So what are millennials doing right now?

Ryan Schwartz:  Not saving enough.  I think I just, I read a statistic yesterday saying two-thirds of millennials have zero retirement savings.  So it’s not happening, I think a big one reason for that is there’s a tendency to jump around with jobs.  And so people aren’t investing into the plans, like it might or should be.  It’s also just that shift from DB to DC or DBs to be going on just as part of your employment benefits and you didn’t have to think about it, and someone was saving and investing for you.  You know, that’s not the case, maybe add student debt on top of that, so it’s a big problem and something that could create huge problems down the road.

Gerald Fegler:  The other thing, I just, last Friday I met with a 23 year old that had been referred to me by an existing client.  And a couple of things that struck me from that conversation was first he said, “I’m making more money than I ever thought I’d make.”  And second was that his formative years were during the last big crash.  And he says, “My generation…”  He was not of this ilk but he says, “A lot of my generation is afraid to invest based on what they saw happen in 2007, 2008, 2009.”  Luckily he, you know, he’s at a company where he’s got employee stock purchase, he has RSUs, they have a 401(k), he’s taking advantage of all of those.  But he readily admitted that, “I’m an exception among my peers.”  And that really struck me, I’d heard anecdotally about this idea that millennials were averse to investing because of that experience that they saw in those formative years.  But this is kind of the first kind of, you know, actually hearing it from somebody’s mouth.

Hoda Imam:  I haven’t heard that either, that’s interesting.

Chad Brown: Yeah.  It’s really actually, it’s ironic because from an engagement perspective, they’re very engaged, right, they’re the Google generation.  The problem is they don’t view the trusted advisor the same way that maybe we would view a trusted advisor, in the sense that that’s the person you go to get information.  They’ll go to a trusted advisor to get information and then they’ll go home and they’ll Google it and they’ll back check it.  And one of the things that we actually found in some research is that they still go to their parents.  And so they’ll go to the baby boomer or their Gen X parent and say, “Well, what would you do?”  And so they’re very engaged, they want the information but there’s almost this paralysis through analysis that they don’t then translate it into active savings or they’re reliant on technology.  So they’re big users of fintech, where they’ll open up a brokerage account but then they won’t actively use it because of this uncertainty of the marketplace.  And so what we have seen, we actually have some solutions that provide them with in plan advice, where they can actually, you know, use technology to get advice and they’re very active with that.  If they have outside accounts and they are saving some they’ll aggregate their accounts to get that information all in one place.  But then the ability to take them say from 3% of savings to 6% of savings or 10% of savings, that’s a tough road because they’re so, almost cynical about the marketplace.

Hoda Imam:   Right.  The quicker it is the more engaged they seem to be, the more manual it is they’re deterred?

Chad Brown:  Exactly.

Ryan Schwartz:   I’m sure we’ll hit on the auto-enrolment, auto-investment piece of that which is going to be a huge way to combat that behavior, right.  And then you still deal with the problem, if people aren’t staying at a job for a year or more they’re not going to be able to participate necessarily in the plan so maybe that’s going to fall on the shoulders of the employer to add greater access by them, yeah, I’m sure we’ll get to that.

Gerald Fegler:  I might add, to Chad’s point, there’s this idea that, you know, the millennial will go back to their parents.  And one of the things we’ve tried to do internally is really build a business where we have multiple generations.  And so we’ve actually seen some of that come true where if we can get introduced to that child of our existing client, you know, even if they’re still in college or just got their first job, that actually is really powerful because if you engage with them in a way, again, that they want to engage.  So having technology, being able to, you know, even have a remote conversation via video conference, if you do those things, we’ve found you’re able to connect and get them onboard and saving.  Because at the end of the day that’s the big thing is they’ve got to start saving sooner.

Hoda Imam: Yeah.  Do savings rate and plan design have an equal impact on retirement security?  Is one more important than the other or does it sort of go hand-in-hand?

Chad Brown:   I think from a provider’s perspective it kind of goes hand-in-hand because one kind of begets the other, right, efficient of smart plan design, it can really be the driver of what gets participants into the plan.  Where we see massive failures though is that you can have the smartest of plan designs, it can have a, you know, a robust matching contribution or the plan sponsor’s doing well and so they’re making a nice profiteering contribution.  Then they fail at communicating to the participants what that benefit actually means to them.  And almost to the point that there’s a segregation between an employee’s normal everyday finances, their checking account, their savings account, paying bills, that kind of thing from the savings, it’s that out of sight out of mind problem.  And so we see a lot of times where they’re active in their personal finances, I’m paying off my student loans or, you know, hey, I own my cars and I own very, you know, I don’t owe a whole lot left of my house, but they’re only saving 3% of salary because it’s so out of sight out of mind.  And so we see that as a big issue.  I mean our whole push right now is more experiential, trying to get participants to fully engage and link their retirement savings to the rest of their finances as part of their everyday financial experience.

Hoda Imam:   Well, because it’s further down the road.

Chad Brown:   Absolutely.

Hoda Imam:  Your car payments this month.

Chad Brown:  Right there, exactly right.

Hoda Imam:  Yeah.

Ryan Schwartz: Sure.  I’ll just say that if savings isn’t happening it doesn’t matter how good … to your point, how good the plan design is.  At the end of the day savings has to occur first and I think the plan design can help promote the savings.  But, you know, the plan design isn’t going to lead you to a successful retirement by itself of course.

Chad Brown:  You know, the irony of the conversation is that so much of it has been pushed towards fees or the performance of the mutual funds.  And oftentimes you’re talking about fractions of percentages in that case.  When you take someone from 3% of salary savings to 6% of salary savings, that’s an exponential increase that far outweighs, and you’re exactly right.

Gerald Fegler:  Yeah, I would reiterate the same.  To me the savings is the biggest issue because you can have the best plan design but if they don’t actually save, you’re never going to hit your goal.  One of the things I tell clients all the time is, “I know it might be painful for you, but whatever the matching is, you need to put that away.”  And then I put it in this context, that’s a 100% return right away.  The other thing I always coach clients with, and we have some plan designs that contribution is in company stock.  And I always talk to clients consistently about, “You need to actually sell that stock on a periodic basis, because I think that’s important to deleverage yourself from your employer.”  You may have worked for the greatest employer in the world, but there’s been too many cases, the one that always comes to mind for me is Enron but where folks had huge amounts of their 40(k) plan in company stock.  The same things, the principles that we use with our clients need to apply to your 401(k) plan.  And so I have that conversation.  It’s been a difficult conversation at times, you know, I get really strange looks.  But when you walk them through those scenarios they tend to have an aha moment.

Hoda Imam:  Yeah.  So when it comes to simplifying the DC line up is limiting choice the answer or rather are there too many choices?

Chad Brown:   I think it depends.  I mean from a provider’s perspective we definitely see that when you get to 10 or 12 investment options, so we’ll exclude like asset allocation options.  So Target Date Funds or risk based investments that are pooled investments, those are typically handled a little bit different.  But if you, from an asset class perspective, if you start to have 10 or 12, that seems to be the limit at which participants will fully engage.  When you start to get beyond that 10 or 12 and you start to have three or four different funds per asset class or you muddy the waters with all kinds of Gucci style asset class allocations, you know, the ultra-hedge short fund that’s in a plan, that doesn’t really belong there.  You definitely see the average participant shut down and they feel like there’s too much choice.  And so it’s easier for them to take the path of least resistance which is not make a choice.  I will tell you that Target Date Funds and asset allocation tools that kind of do it for the participant have improved on that, but that’s incumbent upon the education then, you know, are the advisors that are working on the plan actually telling the participants what it means to use those?  We often will see folks that muddy the waters and they’re using a Target Date Fund and then they have allocation to all these other asset classes that really end up kind of being detrimental to their portfolio and that adds to the confusion.  But overarching, you know, we do agree that simple, efficient but simple is better.

Hoda Imam:  And it’s what sort of like Target Date Fund sort of was handed to them, you know, and a lot of times they’re just, “Sure, whatever,” you know.

Ryan Schwartz:  Yeah.  I think anecdotally what I’ve experienced probably most frequently is too many selections, you end up with participants doing nothing or they’re kind of sitting in cash.  They have this fear of making a wrong decision it almost seems like versus too few decisions.  I’ll see them equal weight each fund, you know, so if there’s like six choices, you know, they’ll have like 20, 15% in each or whatever.  And so that’s something that I’ll commonly see, I agree that there’s definitely a sweet spot there, and it’s most efficient and creates the best outcome for savers.

Gerald Fegler: I think it comes back to, you know, the advisor for the employer really being able to understand the employee base and then design a plan and then options that fit their needs.  And then really do that continuing education.  Every plan I’ve ever been involved with, the more education we provided, generally was higher participation rates and probably better outcomes long term for the participants.  So I think that’s, you know, we’ll talk about this a little bit later, but there’s this whole race to zero, that’s where we can really add value and show our value is in really understanding each employer’s employee base and really being able to meet their needs.

Chad Brown: Yeah.  And that’s the biggest thing from our perspective is that, and you’re spot on, so often smaller businesses, right, 50% of small businesses aren’t covered by a qualified plan.  And it’s that audience where ironically considering all that we’ve been through in the last probably 20 years financially as a country that the average business owner is still making emotional decisions when it comes to the investments.  And so we see it all the time that I have to index, I have to index with no rhyme or reason as to why they want to do that.  We understand, right, it’s, you know, you want to track the index and have lower costs, that all is beneficial.  But they don’t do what Gerry said, which is they don’t look to their participants and say, “Well, maybe that’s not suitable for what my participant base is.  I have an older aging workforce; I need to create an investment profile that allows them to make their own prudent decisions.  But all too often then the small market, the small business market, whether it’s that advisors aren’t being aggressive enough in their consultation to their clients or their clients, because they’re emotionally based aren’t making decisions that would be considered prudent in this day and age.  I think we’ve seen some changes but it’s still a challenge.

Hoda Imam:   But I mean you also agree that it is a very emotional topic as a whole, I mean people are investing hard earned money over decades with the idea that, we’re going to go and sail the world or whatever, what their end goal is.  So there is a lot of emotion that’s [inaudible].

Chad Brown:  And that’s why I went back, you know, what I said earlier about how important it is to get the average participant to engage their retirement account alongside all of their other financial profile so that they understand that it is part of their everyday life.  And that the goal is not to start at zero and then race as fast as you can to the highest possible balance, because in the real world that’s not realistic.  It’s a long term investment, I mean best case scenario you’d get all participants to invest like in a Defined Benefit plan, where they assign kind of a measured amount of risk and a target rate of return on an annualized basis and they would invest in that direction.  You know, we understand that, it’s the average participant that doesn’t, yeah.

Hoda Imam:  Okay.  The race to zero, first off, what are we talking about and then let’s go into the implications.

Chad Brown:  Sure.  It’s a bit tongue in cheek admittedly, right; we’re not going to go to zero.  But I think, you know, over the last decade the retirement … the qualified plan industry in general with the demise of the Defined Benefit plan, they were very expensive for businesses to operate, very little interaction with participants.  And a shift to Defined Contribution, the government has taken interest in that; the regulators have taken interest in that.  And they’ve made it a focus that fees of a retirement plan, while they don’t have to be the lowest, they need to be reasonable and they need to be monitored.  And I think what happened with the explosion of the 401(k) plan industry, you had a lot of plan sponsors that are working with advisors that were in antiquated contracts that were overpriced, they were very thick margins back in the day, and there wasn’t a commensurate set of services that were being driven.  And what that created was this environment almost that record keepers are commodities, we all kind of do the same thing.  And it became very easy to create a spreadsheet and you’d compare all the providers side by side based on cost.  And there’s a bottom line and whoever’s the lowest cost is the provider that you should select.  And so there’s been an environment where that’s an easy road to follow, you go to the cheapest one because after all the values that the record keepers all bring to the table are all pretty much the same, they’re commoditized.

And so I think in the industry, we’ve started to see it slow down a little bit.  But there is this … we’re kind of in this ugly sweet spot where providers, the margins have been compressed, fees have been taken to a very low level relative to historical numbers and now the big providers, Transamerica, Fidelity, npower, Voya, Mass Mutual or John Hancock we’re all in a position where we’re still held accountable to the same level of service that we’ve provided.  We need to demonstrate advancements in technology.  But the fee margins that we’re asked to achieve that with are narrow and so you’ve got this area right now where the marketplace is really in flux.  And you’re seeing provider consolidation over the last three or four years, been a lot of provider consolidation.  And advisors are starting to realize, at least from our perspective that pushing a record keeping provider to the lowest possible fee is not necessarily in the best interest of their client.  And so you start to see this return to a value proposition, which is positive.

Gerald Fegler:   I would add, I mean we’ve kind of been through that; we’ve looked at different providers in our business.  And we’ve kind of ended up choosing folks that really provide value.  Again, the commoditization, the cheapest provider isn’t always the best thing for our client.  And we always have to look at that, you know, we’ll look at it, you know, as a fiduciary, whatever we’re presenting to our client needs to be in their best interest.  And if it’s just the cheapest, but they’d have to do a number of other extra steps, is that really in their best interest?  So we’ll have that conversation.  And I think it’s important to have that dialog with the client and let them know, we think this is the right choice, it may be a little bit more expensive but I think you’re going to get a lot more value for it.  And then that’s, this is where we’re adding value and why we are getting paid.

Hoda Imam:   Is that a hard sell?

Gerald Fegler:  It depends on the client.  I think it’s always on how have you presented yourself over time.  And if you’ve always presented yourself in that way it’s an easy sell.  I think we all come across clients that appreciate value for our service.  And then there are those that view anything that we do in our business as a commodity.  My view is that over the long term those are not the best clients for us because they don’t value what we do, and that ends up being a difficult relationship anyway.

Ryan Schwartz:  I’d add one thing to that.  On the flipside of that, I still come across plans, I’m curious if either of you have had this experience, that are offering funds way above market rates without any options for the participants to invest outside of the plan.  I don’t even know how it’s allowed to happen anymore to be honest with you.  But I’m talking about index funds or maybe enhanced index funds with, you know, rates, expense ratios of 50 bids or higher.  So I’m just curious, if you guys know how that still exists.

Chad Brown:  Yeah, well, I think if you look at the history of the industry, and we don’t have time to do that all the way, but I think that there’s a lot of business that was written from say the early 90s through to the mid-2000s, where they were written on C-Share contracts, they were insurance contracts that were heavy, separate accounts that were heavy laden with revenue that haven’t been adjusted.  There’s a lot of small providers that are still out there that have a lot of this business that unfortunately the plan sponsor’s been underserved.  There’s not been an advisor who’s truly partnered with that business owner to monitor the plan and so the plan’s just been allowed to run.  And that’s an example of where, as I said earlier, the importance of a relationship between a record keeper and good advisory consultants to the plan sponsor.  Because the benefit, if it’s allowed to stagnate, that’s what you end up with.  And it’s not just the investments, it’s the plan design, the business owner’s not realizing the full benefit of the tax savings they could be getting.  They haven’t instituted the auto features that are now allowable, they haven’t embraced Target Date Funds or some sort of asset allocation program that allows participants kind of a one stop shop.  So, you know, typically if you see that high fee environment on a smaller plan, typically it’s probably laden with other issues that the industry’s outgrown but they just haven’t taken advantage of.

Hoda Imam:   What indicators or metrics can an investment advisor use to benchmark the implication of the plan?

Chad Brown:  Yeah.  This is key, that spreadsheet’s important, that I talked about earlier.  You certainly want to know what you’re paying; it’s what populates that spreadsheet beyond fees.  And that’s really when our folks are out there working with advisors trying to educate them on what providers are doing, it’s important to see what the experience is for the participant.  How are they entering into the plan?  Is it just a 1800 number?  Is it just a website?  For us the vast majority of participants today don’t come in through a computer, they’re coming into their phone.  And so what does that mobile environment look like?  Is it truly just a mirror of the website or is it its own app?  Is that app allowing for that experience that I talked about where it integrates with their full financial profile?  The plan design, is it supported by the record keeper?  Meaning they may be working with an ERISA attorney or they may be working with a consulting firm that can do plan design consultation.  But is the record keeper involved in that process to make sure that the full experience is integrated?  Education support is obvious.  As plans get larger, how much of that education is going to be on the shoulders of the advisory firm versus how much of that education will be supported by the record keeper and at what level?  Is it digital or is it just in person presentations?

From our perspective it’s that full experience, you want participants to save the way they want to save.  You want to help them protect that investment, being able to invest in multiple areas and work with their advisor to meet their personality and then retire the way they want to.  And so our guidance to advisors is always look at those three matrix, is the record keeper providing tools and resources to help them save, invest and protect that investment and then ultimately retire the way they want to?

Hoda Imam:  Great.

Gerald Fegler: Yeah, I couldn’t add anymore.

Hoda Imam:  Okay.  What’s the value proposition of your record keeping business?

Chad Brown:  For us as a firm, Transamerica, again, our focus is experience.  We don’t want to be the least expensive.  We understand that fees are important but we also understand that to give up … to become a low cost provider, you’re forcing your plan sponsors that entrust you, forcing them into some tough decisions about what they limit their participants or expose their participants to.  And so our goal is to, you know, to make the retirement plan a place that they go frequently.  Now, we’re not saying every day, but we want it to be an experience for them where when their account hits a benchmark or it hits a watershed event for them whether it be achieving a balance level or the need for a rebalancing or that we actually did rebalance their account for them.  The plan sponsor made a contribution; they hit a landmark with regards to their personal profile.  We want to be that provider that’s providing that information.  And so one of the things that we’re seeing a lot of is, especially with the advent of health savings account is that they’re now being viewed almost as a second retirement account because it’s tax deferred.  It allows a participant to put money in and it can now be invested like a 401(k) plan.  And so we’re seeing that participants are being told not only do you need to save in your 401(k), but you need to save in your health savings account as well.  And that’s tough, so you’re telling a group of people who by and large don’t save enough today that they need to save even more, right.

And so it’s great that they had that information, but what we see is just it’s that paralysis that we talked about, similar to the investment selection, there’s too many choices.  And so really everything that we’re doing as an organization is helping them understand how their lifestyle translates into their financial behavior.  And so saving is just like eating well.  Trying to have freedom financially and the stress that comes with freedom is just like trying to remove stress from your day-to-day life.  We want to make sure that the participants are seeing this full picture of how one part of their lifestyle impacts what their financial profile looks like.  And so a great example of that right now for us is we’ve got a new app that participants can access.  And they can aggregate all of their financial picture out there, but not only can they do that, if they’re active and they use a Fitbit or they have a computer on their mountain bike, our Apple recognize that and it’ll start to integrate in their exercise habits.  And it’ll integrate in if they’re on a diet and they have calorie intake goals that they’re looking to do, we’ll actually celebrate the fact that they did 10,000 steps today with them.  So it’s that effort to try to make it experiential because at the end of the day nobody looks at their 401(k) account enough.

Hoda Imam:   Or to get to decumulation.

Chad Brown:  Yeah.  Well, and we want them to be, we want it to become part of their lifestyle.  And it’s hard, no one’s achieved it, no one in the industry.  A lot of folks have tried and, you know, we’re really making a big effort.  We’ve spent the last two years actually morphing from this kind of commoditized approach to the retirement industry, driven heavily by fees to much more of an experiential financial services firm.

Gerald Fegler:   I would just add, I mean I didn’t know you guys were doing any of that.  I’m really interested.  But I think what we do in evaluating record keepers is not too dissimilar, because we’ve got to identify what our clients are going to need.  What’s going to get them engaged?  At the end of the day for us the more engaged the participants are at the client, the more productive the plan is for everybody.  It’s also, you know, what’s going to make them really use it.  So I love all those ideas and that’s one of the things we look at when we’re looking at a record keeper for a specific client.

Hoda Imam:   Okay.  Ryan, did you have anything?

Ryan Schwartz:   No, I think they’ve nailed it.

Hoda Imam:   Okay.  What industry and regulatory factors affect advisors and employers?

Chad Brown:  So, from an industry perspective I think, what we see a ton of, so we work with typical wire house advisors, we’re working with RIAs, we work with independent benefit consultants.  And what we’re starting to see is from a technological perspective, there’s massive spill-off from the technology industry into financial services.  I actually live in Austin, Texas and so in my market in particular, I joke that my friends are involved in some new fintech adventure, almost on a weekly basis, that they’re doing something that’s aimed at taking their financial services expertise, bringing it into the technology industry and trying to mesh the two together to create more efficiency.  And I think from a benefits perspective, what you’re seeing is the oldest of industries; I heard them referred to this morning on another program as the dirty fingernail industries.  That they’re actually demanding that level of technical expertise from their financial services providers.  So they expect that their lives, while they may be in older industries that are kind of propping the country up, whether it be agriculture or manufacturing or hard goods, they’re still demanding that high level of technological expertise and understanding from their financial services providers.  And so, you know, we were talking earlier that a major provider announced that they’re going to allow for free equity trades.  I mean that’s the kind of thing that trickles down throughout the industry.  You know, pushing fees down at the same time but using the efficiency of technology to get access to more people, I mean we see that a lot.

Hoda Imam:  It’s a total domino effect.

Chad Brown: Yeah, totally.

Hoda Imam:   Let’s move on to the automation of salary deferral, enrolment and investment.  As more employers opt into automated enrolment investment, how is this helping employees?

Ryan Schwartz: So, I think this is probably the biggest innovation in at least the last 10 years in the retirement plan space.  I think as a result of the Pension Plans Act of 2006, you’re seeing employers be able to automate enrolment, increases in the savings rate and investment of some of these qualified default investment alternatives.  And that has just created a much better environment for savers and it’s just forcing their hand to save.  Inertia is always something you hear people talk about, is a problem with, if that plan doesn’t get set up right away, it often will just get left behind and no one will manage it.  So it kind of uses that behavior to the participant’s advantage by letting the inertia of just letting an automated system run its course, and get people on the right track quicker.  So I know that the participation rates in automized plans, I’m referencing a Vanguard report that came out this year is roughly, you know, in the 90s versus voluntary plans.  You know, so participation goes up with age, it goes up with income and tenure with a company.  But with the voluntary plans you’re seeing a range of anywhere from 50-80% at the top end, so I mean it’s just a vast improvement from where they were pre automation.

Chad Brown:   It’s probably the most important piece of that legislation, so much so that this current legislation that’s up for vote, it’s the Retirement Enhancement Savings Act, they call it RESA.  There’s actually provisions in it that relax a lot of the safe harbors that we’re provided as far as caps on a lot of those benefits.  This is the biggest piece and you hit it right on the head, if you look at the numbers, originally the average auto-enroll was like at 3%.  And the irony behind that is there was no magic behind that 3% number, the DOL had provided an example, it said say for instance, if your participants were put in at 3%, and so all the plan sponsors said, “Well, I’m going to use 3%.”  What we’ve found is that if you take that number and double it, you auto-enroll them at 6%, you still have like 95% take rate where people don’t back out.  And so there’s this big realization that participants really want to be told, they really want it to be automatic, they want to see it but they want it done for them.  And we’re seeing it start to translate beyond just how much should I save and how much should I increase it annually.

We’re actually starting to see the average participant clamor for in plan advice.  And they’re willing to pay for an advice service that will tell them based on their personal circumstance what should my deferral rate be?  How much should I increase it on an annualized basis?  I want to work with my advisor, what’s available to me from an asset allocation perspective?  And then have all that information, spit out to their advisor if they’re working with one or if it’s the advisor of the plan make sure that that advisor has access to that information, that’s all part of … it goes back to these auto features, that if we didn’t have them driving a participant to that kind of hands-off approach to the savings habits, it’s really trickling out into much more of an advisory environment for the average participant.

Gerald Fegler:   I think I can’t reiterate anything that these guys haven’t already said.  Auto-enroll to me just, as we help clients build plans, something we always encourage that they do but it gets back to the conversation we had earlier about that the savings rate might be the most important part.  So if you can automate and create that automatically it’s going to benefit the participant in the long term.

Chad Brown:   I think an important caveat though, and before an advisor goes out, say they get three or four plans on their books and I’m going to go to all three of them.  I’m going to talk about auto-enrollment, you have to be smart about it because if that plan has a match contribution for example, and the business is cash strapped or is cash flow sensitive, you’ve got to be careful.  You put auto features in and you’re doing a dollar for dollar, 3% match, you’re going to increase your match costs pretty quickly because of that auto-enrollment.  And so what it allows you to do is just start thinking about plan design more broadly and more intelligently.  Instead of doing dollar for dollar to 3%, maybe do 50 cents on the dollar to 6%, or do 25 cents on the dollar up higher.  So you stretch that match out which increases the likelihood that participants are going to go to what Gerry said earlier, which is save to the full extent of the match.  There’s ways that you can mitigate that increase by auto-enrollment.  And also, you know, really improve plan design for the plan sponsor.

Hoda Imam:   And auto-enrollment has really helped the, you know, well, online financial planning has really benefitted when it comes to, you know, this.  I think that there’s a lot of, the investors have become a lot more savvy because of technology.  And so when it comes to the automation of salary deferrals, it all kind of goes hand-in-hand and it ultimately helps the investor, right.

Chad Brown:  Yeah, 100%.  And we’re actually starting to see it trickle over beyond just retirement benefits.  And we’re starting to see it, you know, there are benefits administration firms out there that aggregate all benefits, so health, supplemental benefits, life insurance, all that kind of thing.  And so plan sponsors are looking for these one-stop shops where they can make it easier for their participants to interact with a full benefit suite.  All too often it’s very segregated, you know, they’ve got their plan in one place and they’ve got to their employee benefits in another place and they’ve got supplemental benefits elsewhere.  And so you get into a position where the bigger plan sponsors are really starting to look at how can I make sure that my participants when I ask them to go look at their benefits profile, they’re looking at all of their benefits.  I think that’s a key mover for the industry.

Gerald Fegler: And kind of on the flip of that, what we’ve just recently participated in a wellness fair for a small pre IPO company.  And we’re seeing more of that where organizations are putting together kind of the exact same thing you talked about.  We were there as the financial advisors, but there was wellness, their health benefits, insurance, all of these providers were there.  And again, it’s a great millennial audience mainly, folks that are making good money.  And we got a lot of really interesting questions out of that and a couple of interesting follow-ups.  So I think as advisors we need to think about ways we can, you know, here are big here in San Francisco, there’s an enormous number of start-ups, that you’ve got young people making really great salaries, but they need that advice and they need it holistically.  So one of the first conversations I ask to new clients is, “Are you maximizing your benefits package?”  And that means both DC, your health, HSAs, as Chad mentioned earlier.  You know, those are all things that we can help our clients maximize their benefits.  And I think we just need to be part of that overall conversation.

Hoda Imam:  I find it so interesting, it’s obvious that like a wellness program and say a retirement plan would kind of go hand-in-hand.  But it’s interesting that the two are linked, I mean linked together.  When you mention it, it makes sense but I didn’t, you know, think about that before, so.

Gerald Fegler: I would have never thought of it until somebody approached us.

Chad Brown: Well, and it’s really been the advent.  There was a day where I wish I sold just like health benefits, there’s a very few industries where you can increase the cost of them by 15-20% a year and get away with it.  And that’s not a dig on that industry by any stretch of the imagination.  But I think it’s understanding that as the workforces age, the tie of employee benefits to the retirement program or to financial services in general is becoming inseparable because as they age you have higher occurrence of workplace injuries.  You have a higher occurrence of sick time; you have a higher occurrence of prolonged absenteeism because of issues that come with an aging workforce.  And it’s becoming obvious from especially the very big benefit shops nationally, that they’re tying the two together.  And they’re telling their employee benefits clients, “You really need to invest in your retirement program because your goal shouldn’t be to have an average age of your employee going up a year every year.”  As your employee group ages you want your employees to be able to retire the way they want to.  And the way you do that is through smart intelligent retirement plan design, aggregation of the benefits and working with advisors and consultants that are going to have your company’s best interest in mind, not only the participants, but the company’s best interest about how do you design that benefit.  So it’s serving its purpose, recruiting and retaining, but then ultimately helping people retire with dignity.

Hoda Imam:  Yeah.  So we talked about Target Date Fund solutions.  But really quick once again, what are the pros and cons?

Ryan Schwartz:   Sure.  I mean as an alternative to doing nothing I think they are infinitely better than an account not being invested or maybe being…

Hoda Imam:   That’s how good they are, better than doing nothing.

Ryan Schwartz:  And so I mean basically you’re buying one fund that is a diversified portfolio under the surface.  And they’re generally based on retirement age target sates.  So I think they can serve a great purpose.  They aren’t considering an investor’s total picture obviously, or maybe other held away accounts or the tax status of accounts held elsewhere if they’re saving in other places.  So maybe there is other ways you should consider investing.  And then one interesting thing that they find with people that buy these target, or that own Target Date Funds is that the longer they own them, I think Chad maybe alluded to this, they’ll start adding other funds around it in their plan, in their account and it’s really not meant to serve that.  It’s not meant to be one of multiple investments, it’s meant to be the only investment.  So it gives people the sense that maybe they’re not diversifying appropriately.  So that’s just one issue that I’ve seen, but they serve a great purpose.

Gerald Fegler: I would reiterate, they serve a great purpose for clients that can make decisions and for those plans where somebody like myself or Ryan isn’t there to help advise the participant.  It’s infinitely better than anything else that they could do.  That being said, all the points Ryan made about some of the issues that could make them not the best investment are also true.  So I think it’s important that in plan design to offer those because you know you’re going to have participants that won’t reach out, you know.  Some people just aren’t very good at self-advocating.  And so if there’s at least a default for them to do something that’s to me better than almost anything else.

Chad Brown:   Yeah, but Gerry, you make a good point.  A key point is it’s not an opportunity for the advisor and plan sponsor to shirk the responsibilities with regards to education, because some of the mistakes that we see are the advisor doesn’t look at the choices of Target Dates and understand that some have a glide path that goes to retirement date or to age 65.  And some are aimed out 85 or older, and so there’s a big disparity in the asset allocation, those that are aimed at 65 are more conservative at 65.  Where those that are aimed later are much more aggressive and so participants will think they’re conservative at 65 and it’s really not, it’s still an equity heavy portfolio.  There are participants that … and we thought this was an early on occurrence, when they first came out to the industry, it’s really had a continuation which is there are participants who think that if I invest in that I’m going to have a full retirement balance when I retire because it’s a Target Date Fund, it’s designed to get me to my retirement date.  And it just shows the lack of understanding of how markets work, they don’t understand that it’s really just an investment tool to help asset allocation and drive them towards a more conservative portfolio.  So it’s important to have … it really is an example of the importance to have good advisors tied to it so that the participants are getting that information.

Hoda Imam:  And I imagine in this sort of realm, one of the hardest aspects is maybe telling somebody, an investor that you might have made the wrong choices in the past.  And this is the outcome or … but we can maybe do this and that, but having that person sitting in front of you and being able to have this conversation I’m sure is tough.

Gerald Fegler:  Yeah, those are uncomfortable conversations, but ones that need to be done, you know, gently but honestly.  But I think if you set up the conversation with the client already, if you have engaged in a really transparent and honest way they know, you know, at least my clients know from me that I’m going to tell them the hard truth, maybe truth they don’t want to know.  But it’s all in their best interest.  I think the other point I’d make about Target Date Funds is that not all Target Dates are created the same.  And that’s where having the right set of Target Date Funds is really important.

Hoda Imam:   Right, let’s move on to maximizing retirement plans.  We talked about what baby boomers and millennials should be doing.  But what are some ways in which an investor can put away as much money as possible?

Ryan Schwartz: So yeah, I mean I’ve seen the mega back door become more prevalent, especially with [inaudible] tech companies for those super savers that really just have the cash flow to support additional savings.  That’s something that we’ve seen more of, where they’re able to save after tax money in the plan and then do an in plan conversion.  I’d say that’s the biggest one.  As far as like small businesses, implementing a profit sharing plan if they don’t already have one, just exploring other retirement plan options, that they might not already be looking at, that’s what I come across the most.

Gerald Fegler:  Yeah, I would say both of those.  I think the other thing that I try to really work with clients on is when they come to me is where are they saving?  How do we maximize that, really in the context of their overall long term goal?  And that’s kind of where doing a really in depth financial plan helps us understand what are those long term goals and then what tools do we have both at the employer level and outside to really maximize that savings vehicles.

Hoda Imam:   Alright.  And the last topic we’re going to touch on really quick is the decumulation phase of retirement.  What are some best practices for clients and plan sponsors?

Chad Brown: I think from a provider perspective I think it’s making the business owner, and particularly in small businesses, because there’s a bifurcation between the larger retirement plan market and the small market.  The small market, there’s an opportunity to be far more flexible with how they work with their advisor.  You’re able to tailor towards that business owner or that group of business owners and what they’re looking to achieve, how they want to tie the business into the retirement picture and how they design the plan off of that.  On the larger market side it’s making sure that the participants are aware of the services that are available out there.  Oftentimes there’s not an advisor that’s dealing directly with the participants.  And so it’s making sure that that in plan advice that we talked about, carries through to retirement advice, meaning that the participants have a call center that they can call into, that gives them their options regardless of balance size.  There have been some services out there that are tailored towards those folks that have over 250,000, over 500,000 in assets, the average participant doesn’t have that.

And it’s important that when you’re serving the full spectrum of the participants in a plan that the provider that you’re working with or choosing to work with has the ability to give that average participant that level of kind of consultation to understand, whether they roll out with the advisor on the plan and they open an IRA rollover to decumulate, whether there’s an in plan tool.  Because there are providers that still have in plan annutiization available.  Or that they’re rolling out to an insurance product that’s appropriate for them that provides that annuitization.  It’s amazing to us how few participants actually have access to that level of information, but that’s the starting point from our perspective.

Gerald Fegler:   I think that’s the great kind of handoff to what we do.  And then we can really identify with the client whether moving that to a rollover IRA and we build some kind of income portfolio that generates some kind of income that they need.  Again that has to be within the context of what markets are going to provide to us.  But also to Chad’s point, maybe depending on the client, maybe an annuity product might be the right thing for them.  And one of the things we’ve found is that there’s some new annuity products out there that five years ago probably would have never even looked at an annuity.  Now they’re actually much more reasonably priced, they’re built for IRAs like ourselves.  So, you know, we’re a lot more interested in looking at those things today, because for some clients in retirement, once they’re not working, not knowing that they’re going to get that payment every month or every quarter is really disconcerting to them.  So it’s really about knowing your client and being able to build a retirement stream that meets their needs.  It’s the same concept as we talk about when we build a financial plan, it’s about their needs and their goals and their objectives.  The retirement income needs to be the same thing.

Ryan Schwartz:   Yeah, I’ll just say, [inaudible] what Gerry’s saying, everything’s going to come back to the financial plan for us as an advisor and as a financial planner.  That’s where we’re really going to do the heavy lifting as far as outlining as many scenarios as we possibly can for the client and helping them understand, you know, what’s a realistic level of income to expect?  What tax liability should you expect, or the timings of these cash flows and tax liabilities.  So everything’s always going to come back to that and that’s where we’re going to try to eliminate as many surprises as possible.