Art by Tomi Um
initially gravitate toward judging their retirement plan recordkeeper based largely on cost, says adviser Joshua Ulmer, describing his frequent experience working with new clients. He helps them shift their focus onto the value received for those fees.
“We know from ERISA [Employee Retirement Income Security Act] that there is not an obligation for the fees to be low: There is an obligation that fees be reasonable for the services being rendered,” says Ulmer, corporate retirement director at The SeaPort Group at Morgan Stanley, in Portland, Oregon, and the 2017 PLANSPONSOR Retirement Plan Adviser of the Year. “So we help sponsors understand what recordkeeping services are commoditized and what services add value--and we define ‘value’ as things that contribute to better participant outcomes and/or alleviate critical administrative duties for plan sponsors.”
Basic recordkeeping services increasingly have become commoditized, Ulmer says. And, with the pickup in fee-focused participant lawsuits, sponsors increasingly associate failing to utilize the lowest-fee provider with risk and liability. “So it’s incumbent on us as advisers to understand the nuances of these recordkeeping arrangements,” he says.
As fiduciaries, plan sponsors need to balance recordkeeping fees and value received, says attorney Jennifer Eller, co-head of the fiduciary practice group at Groom Law Group, Chartered, in Washington, D.C. Although sponsors are not required to use the lowest-cost provider, she says, they often feel compelled to do so. “They’ve seen in fee lawsuits that plaintiffs’ lawyers are basically saying, ‘This is a commodity; it’s all the same. So you just need to buy the cheapest,’” she says. “In reality, it’s not that you’re necessarily prudent because you get the cheapest options. But I totally understand how many sponsors have come to think they need to focus on getting the lowest fees.”
Many sponsors are still unaware of what their participants actually pay in recordkeeping fees and what valuable services they and the plan get for those fees, says Todd Hughes, an attorney and director, ERISA and vendor services, at advisory firm Pension Consultants Inc. in Springfield, Missouri. “This is not something you should just look at every three to five years, when you do an RFP [request for proposals],” he says. “You should look at this annually, in some form. If not, you’re probably missing out on getting more services or lower fees for participants.”
With many plan-level services commoditized, recordkeepers like to promote what they consider their “value-add” services, says adviser Matt Byers, founder and president of Eminent Wealth Strategies in Indianapolis. “But you have to define what’s truly important to each plan sponsor,” he says.
What follow are four areas where many plan sponsors find a recordkeeper can add value.
“The more data we can analyze, the more we can help a sponsor make good decisions about its plan,” says adviser Joseph DeNoyior, managing partner at Washington Financial Group, the 2017 PLANSPONSOR Retirement Plan Adviser Small Team of the Year, in McLean, Virginia.
DeNoyior sees real value in providers that can do predictive analytics for sponsors on plan-design changes they are considering. “Many recordkeepers will tell you that they have plan-health reporting,” he says. “But if it is not dynamic, then we don’t place a lot of value on it. By ‘dynamic,’ I mean that it allows us to break down the likelihood of success of a potential design change based on groups of employees, such as by age, tenure and geographic location.”
A recordkeeper’s predictive analytics can play a key role in helping a sponsor decide between different plan design options, says adviser Kathleen Kelly, managing partner at Compass Financial Partners in Greensboro, North Carolina.
“It is very helpful when a provider can tell you, ‘Here’s what your population’s retirement readiness is with your current plan design, and here is what the projected retirement readiness outcomes will be if you make this design change or that design change,’” she says.
“Some of the providers’ websites are going through massive security changes, because sponsors and participants are worried about security issues,” Byers says. “Some providers have really stepped up their game, but others have been slower to do that.”
Compass Financial Partners, also on clients’ behalf, examines recordkeepers’ data security capabilities, Kelly says. “Our clients are really looking at, ‘How much does our provider spend on cybersecurity, and what internal resources are dedicated to ongoing cybersecurity initiatives?’” she says. “It’s not as much fun as talking about things such as retirement readiness or plan design innovations, but it’s important.”
At the participant level these days, plan sponsors judge the value of a recordkeeper less on its willingness to do on-site education, DeNoyior says. They are more apt to find value in it using behavioral economics in all participant communications to help increase engagement, he says.
“There are many differences between recordkeepers, in the employee web experience,” DeNoyior notes. “We’re looking at, what does the website really offer? For example, what is the first thing that is communicated when a participant logs in? And how does that help the participant make decisions that can improve his or her retirement outcome?”
The value focus now relates more to whether recordkeepers provide relevant, personalized information that helps participants make good choices, Kelly says. So Compass looks for what a recordkeeper offers on outcomes-based educational tools. “What is the usage of the tools by a plan’s participants? And, if they are being used, have they resulted in positive behaviors by those participants?” she says. “Every recordkeeper has got its ‘shiny object,’ but, at the end of the day, you want shiny objects that produce results.”
Retirement income tools introduced by recordkeepers in the past several years have helped employees begin to understand goals-based investing, so they know their likelihood of success and, potentially, what changes they could make to get on track, Ulmer says. “Now, I think every significant recordkeeper has a platform that will enable a participant to create that type of personalized plan,” he says. “So the next issue is that it’s helpful for us to be able to pick up data from the recordkeeper on participants’ usage of those tools.”
And recordkeepers do have varying capabilities in what Ulmer calls giving “the nudge,” meaning making the suggestion to a participant of the next, best step to take to improve his retirement readiness. “The idea is to help the employees understand, in a targeted fashion, what is an actionable thing they could do now,” he says. “We find that, on some of the better recordkeeping infrastructure today, an employee can log onto the website and immediately see a tailored message on his or her next best step.”
Much of participants’ ultimate outcome stems from how much money they defer, and Byers says that personalized information helps motivate them to take action. “One of the main things is the ability to get immediate feedback, if they are thinking about changing their deferral, about how that will affect their paycheck and their projected balance at retirement,” he says. “If you can give participants immediate feedback on those things, it’s easier for them to pull the trigger and increase their contribution.” While that may become an industry standard in the future, he adds, it hasn’t yet.
The value of personalized education goes beyond retirement savings to broader financial wellness topics, Kelly says, adding that customization varies widely among providers. “We want to know: How customized is a recordkeeper’s financial wellness program to a specific employee group? And what is the personalized output that participants are going to get if they utilize the program?” she says. “We also find that, for the majority of financial wellness issues participants face, their preference is still for a personal interaction. Participants often just want to talk to somebody, so we look closely at call center capabilities that back up the online education experience.”
For clients with a decentralized work force, these apps play an increasingly important role, DeNoyior says. “In those cases, one of the things we stress is that engagement is going to have to be through ‘push’ messages sent through mobile technology, because we can’t sit down with those participants to educate them,” he says.
DeNoyior sees huge differences in the strength of providers’ mobile apps. “Some mobile technology is just a mobile-friendly version of the participant website. Some other providers have a very basic mobile app that just gives canned information not personalized to participants,” he says. “Then there are the real mobile apps that [let] participants do some things--get access to their account and use some of the tools. And, finally, there are apps that allow for push message technology to participants and that allow for them to fully use … retirement readiness tools.”
He says research shows that people either get engaged by a mobile app, or not, within 20 to 40 seconds. “If a participant goes on the app and all it shows is the participant’s balance,” he says. “I’m not sure how helpful that will be as far as engaging the participant.”
Meeting Clients’ Needs
How sources determine what provider services add value to a plan