The Tumult Facing Investment Advisors To 401(k) Plans; Wall Street Price-Gouging Prompts Calls For Regulatory Reform And Increased Disclosure; Promotes Benchmarking-Mania edit
Thursday, May 30, 2013 16:12

Tags: 401(k) | fiduciaries | retirement

For investment advisors to 401(k) plans, it’s a tumultuous time. Some 70 million Americans will hit retirement age over the next two decades, whipping the 401(k) advice business into a competitive frenzy over management of those assets. Meanwhile, the U.S. Department of Labor is about to reintroduce stiffer rules that, if adopted, would require advisors to ERISA plans only to provide advice that is in the best interest of plan sponsors and participants, no longer permitting financial advisors to sell products that are merely suitable for clients in favor of an ethical standard requiring ERISA-plan investment advisors to show no self-interest in their advice. At the same time, companies like BrightScope have kicked off a mania for rating and benchmarking 401(k) plans against their peers.

In a sign of the times, a recent documentary on PBS’s Frontline, “The Retirement Gamble,” exposed a dark side of the qualified retirement plan business. All ERISA investment advisors should see the program.

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Watch The Retirement Gamble on PBS. See more from FRONTLINE.

Frontline correspondent Martin Smith recounts how, beginning in the early 1980s, the responsibility for financing the retirement of 70% of Americans was transitioned from corporate-sponsored defined benefit plans that provided lifetime-guaranteed pensions over to defined-contribution plans that made individuals—instead of corporations—responsible for retirement funding. As the transition unfolded over the 1980s and 1990s, medical advances lengthened the lifespan of Americans, raising raised the cost of retirement at a time when medical costs were soaring.
Vanguard Funds’ John Bogle (24 minutes into the video) displays a chart showing the retirement outcome of a plan participant investing in a mutual fund for 50 years at a 7% return with 2% annual fees. Because of the magic of compounding, the effective return of 5% annually nets him only one-third of what he would have accumulated at a 7% annual return.
“Do you really want to invest in a system where you put up 100% of the capital as fund shareholder, you take 100% of the risk, and you get 30% of the return?” says Bogle.
Fund-company record-keepers, accountants, investment advisors, and financial advisors are called out in the documentary for sapping the retirement savings of Americans, and Wall Street executives are asked about the wisdom of selling plans packed with actively managed funds that charge high fees instead of index funds.
“Money managers always want more and that’s natural enough for most businesses,” says Bogle, “but it’s not right for this business.”

With the fiduciary standard likely soon to be applied to ERISA-plan investment advisors, fees under scrutiny, the rules of the 401(k) business are likely to be drastically altered soon. So Tom Kmak should be a great guest speaker at tomorrow’s A4A webinar.

Kmak is the founder of Fiduciary Benchmarks (FB), which helps IAs optimize 401(k) plans. Before founding FB, Kmak started JPMorgan Retirement Plan Services in 1990. When he left in 2007, his business unit employed 1,100 and served 200 large plan sponsors with 1.5 million participants and more than $115 billion in assets. FB makes software allowing advisors to benchmark plans using a patented system and that enables you to simulate “what ifs” at the plan level as well as the participant level.  
Kmak says any ERISA-plan benchmarking service based on a Form 5500 is flawed. The data that can be gleaned from the disclosure form, he says, is inadequate to benchmark a plan with any accuracy. For example, Kmak says he was with a large media company earlier this week that had measured its participant rate at 90%, but one of the many benchmarking services using data from the Form 5500 estimated its participation rate at 60%. According to Kmak, services that rely on the Form 5500, which includes BrightScope, Judy Diamond Associates, and AdvisorLab are not used by plan sponsors or consultants to benchmark plan performance and fees.
Kmak knows that he can’t turn the webinar into a commercial for his software, but it has a capability that I’ve asked him to demonstrate. To optimize a plan, you need a dashboard that globally controls seven key variables. For example, if you want to show a plan sponsor how changing the employer-match, auto-enrollment rate, and other key variables is expected to affect the plan, Kmak’s software enables such simulations, and it optimizes for the best projected outcome for participants.
FB’s is also the distributor of software that optimizes for retirement readiness across different 401(K) plans. While plans usually have tools optimizing for retirement readiness, the calculations for retirement readiness from one plan to the next can differ significantly. By applying the same calculation of retirement readiness across all the plans you advise, you’ll be able to make recommendations based on data normalized across the plans. Plus, you won’t have to learn myriad retirement readiness apps used by different record-keepers; you only need to learn one piece of software.
Kmak has strong views on benchmarking services that rate plans versus their peers. He says comparing one plan to another is not very important. The best 401(k) benchmark is retirement readiness—a measure of how effective a plan is at readying participants for retirement.
In a tumltuous time for investment advisors to 401(k)s, Kmak understands the business about well as anyone I know. He should be a good speaker, Friday at 4 ET. To attend A4A webinars and access replays and CE credit 24/7, please join A4A. ($60 annually).

Do you rely on 401(k) benchmarking services basing ratings on Form 5500?  Do peer-rating of 401(k)s matter to you? And what do you think of Frontline coverage? Please let me know what you think.

TIAA-CREF Study Recommends Ways To Improve Defined Contribution Plans And Boost Retirement Readiness edit
Friday, April 26, 2013 10:03

Tags: 401(k) | retirement | retirement income

TIAA-CREF, the leading provider of retirement services in the academic, research, medical and cultural fields and a half trillion dollar under management, today released a study recommending best practices for improving retirement plan effectiveness and retirement readiness of plan particpants.

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The white paper identified several additional retirement plan features that help drive overall retirement readiness and some surprisingly detailed recommendations that advisors advising on qualified plans should take note of:


  • Automatic plan enrollment works, but contribution rates need to be at least 4% and increase automatically. Many organizations auto-enroll employees at a default rate of 2 to 3%. Too many employees stay at that rate, which is far too low to provide enough for retirement.
  • Employer matches drive plan participation, but the algebra needs an update. Most employers match dollar-for-dollar to a certain rate, frequently in the range of 4 to 5%. Instead, employers should consider matching 50 cents on the dollar up to 8 or 10%. Employees view matches as “free money” and a match on a higher employee contribution percentage could encourage employees to raise their contribution rates accordingly without increasing the dollar amount of the employer’s matching contribution.

    Annuitization options should be in all plans. Employees who save enough to generate at least 70% of pre-retirement income (including Social Security) have a good chance at a successful retirement. Yet research also has found that a retiree electing to take systematic withdrawals equal to the same income payments they would receive from an annuity has more than a 50% chance of running out of money in retirement. TIAA-CREF research suggests retirees should annuitize enough of their savings to generate approximately 20 to 30% of their overall income needs.
  • The optimal number of investment options is between 5 and 10. Having too many investment choices leads to lower plan participation, employee indecision and increased fiduciary and administrative responsibilities for plan sponsors.
  • Guidance is not enough. TIAA-CREF research found that individuals receiving actionable financial advice are five times more confident in their retirement prospects than the average American worker.
  • Employee experience is crucial to plan success. To optimize participation rates and plan success, it is critical to target employees with personalized, relevant communications and educational tools that are available in person, online and over the phone.
  • Limit or altogether eliminate retirement plan borrowing. Loans raise plan cost and detract from employee retirement readiness.
What Can Advisors Do To Ensure Participants A Paycheck For Life®? edit
Tuesday, June 12, 2012 13:15
It’s official: baby boomers are beginning to retire. For this reason, advisors may see (or have already seen) an increase in the number of participants retiring. Those on the verge of retirement have accumulated wealth their entire working lives and have created their own Paycheck Manufacturing Companies from their 401(k). However, is this enough to guarantee them a Paychecks for Life®?

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There are several steps advisors can take to help ensure that those thinking about retirement or the newly retired won’t run out of money during their “desirement” years – the time that they spend in retirement.
Before Retirement
As Social Security’s demise looms on the horizon, an increasing amount of Americans worry if their savings will be enough. The 401(k) plan has come to be one of the greatest vehicles for providing an adequate retirement. However, many workers (according to some estimates 40 percent) do not enroll in their companies’ 401(k) plans, and if they do, they probably are not saving enough. There are several steps you can take as an advisor to help participants to begin saving early and often, ensuring themselves Paychecks for Life®.
Step One: The 401(k) on Auto-Pilot
Many studies have shown that automatic features, including auto-enrollment, auto-placement, auto-escalation and auto-rebalancing, drastically improve participants chances of having successful retirements. Although participants cannot always control the automatic features in their plans, the sponsor can. You should talk with plan sponsors about restructuring plans to include automatic features, which offer them benefits, such as increased enrollment and fiduciary protection, as well.
Step Two: Other People’s Money
Participants are the masters of their own destinies, and you can teach them how to exploit other people’s money in their 401(k) plans. The first investors in their 401(k) Paycheck Manufacturing Company (besides the participants themselves) are their employers. If their company has a contribution matching program, make sure that participants use it. If they do not contribute at least the full matching percentage, they are missing out on free money. Some participants will only contribute two or three percent of their salaries to their 401(k)s, but if their employer is offering a five percent match, they should contribute at least that much to start.
The second investor in their Paycheck Manufacturing Company is Uncle Sam. Although most people consider him to be a “taker” more than a “giver,” Uncle Sam has provided 401(k) participants with a great opportunity. The contributions made to 401(k) plans are made with pre-tax dollars, and this allows participants’ assets to grow more quickly than if they had contributed in after-tax dollars. If your participants are in the 25 percent tax bracket, for every $100 they contribute, they are not taxed the $25 they would have been if they had not invested that money in their 401(k)s. They are already guaranteed a 33 percent return on their money, just by contributing to their 401(k)s.
Approaching Retirement
In addition to the steps made well before retirement, there are several other actions you can take when participants are thinking of retiring.
Step One: Assets vs. Liabilities
Dan is age 65. He put money into his 401(k) for over 40 years, and now he’s ready to enjoy the fruits of his labor. Dan has managed to put away a considerable sum of money, but will it be enough to cover his liabilities? Many advisors simply focus on the assets that participants were able to accumulate, but some are beginning to compare this amount to liabilities. If Dan has a large amount of debt (if he hasn’t paid off his mortgage or his credit cards, for example), his retirement plan assets might not be enough to provide him with a Paycheck for Life.
The first step in determining if participants are ready for retirement is to compare their assets with their liabilities. This will provide an initial snapshot of their financial future. If it’s unclear whether participants will have enough money to enjoy their retirement years, you can explore other options, such as working longer, increasing contributions to the maximum amount, etc. If you are uncertain about whether assets will be depleted prior to the actuarial age of death, it’s always better to err on the safe side and offer them several alternatives to ensure that they won’t run out of money, including buying an annuity, which is discussed in more detail below.
Step Two: Lifespan
Unfortunately, we can’t see the future. We don’t know if Dan will live to be 82 or 122, but either way, it is our job as advisors to make sure he will never have to struggle financially. It is difficult to calculate lifespan, but we can estimate spending needs slightly better if we do. Depending on spending habits, Dan needs to replace 70 to 90 percent of his annual income.
We can try to estimate Dan’s lifespan based on his parents, but there is still some risk involved since there are many factors that we may not know. Both of his parents may have smoked heavily from a young age, but Dan may never have touched cigarettes. Dan may be overweight whereas his parents exercised regularly. The list is endless. The best thing we can do is overestimate his needs rather than leaving him without money. There are on-line calculators available that estimate longevity based on health and a number of other factors.
Step Three: Annuities
Annuities are an increasingly popular investment choice since they provide guaranteed income, no matter what. Annuities protect retirees from a variety of risks, including outliving assets, but they also protect against investments declining in value and against inflation. Many participants do not consider lifetime income options because they are unfamiliar with this these kinds of investments. You should talk to participants and educate them about lifetime income options, including annuities.
Some plan provider may offer an annuity option within the 401(k). Although these options are typically called “lifetime income solutions,” they behave very similarly to annuities, which participants are often more familiar with. To use this option, participants must first purchase a “rider,” a contract for additional insurance, which can insure all of or only a portion of the participants’ assets. These types of annuities may not be for everyone since there are fees involved that reduce the portion of investable money within 401(k)s. Since not all providers offer annuities options within 401(k) plans, portability is another issue. “Traditional” annuities, outside of 401(k) plans, do not have these drawbacks and can be a great asset if longevity or inflation are major concerns for participants’ assets.
Retirees may not want to buy annuities as soon as they retire, but it is helpful to set aside a sum of money for future purchase. This keeps their options open if they are ever in need of alternative sources of income.
As advisors, we can take steps and make recommendations to participants or those nearing retirement. By helping participants to utilize the resources at their disposal, we can ensure that participants have a Paychecks for Life®.
401(k) Plan Participant Meetings Present An Opportunity To Build Trust While Gathering Data edit
Friday, June 01, 2012 15:17

Participant meetings are one of the best opportunities you have as a financial advisor to boost your assets under management. Rule of thumb is that for every dollar in a participant’s account, there are $7 of participant assets in other accounts, assets you could potentially manage.

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The conclusion of enrollment meetings is an ideal time to schedule one-on-one meetings with the plan sponsor’s employees. The purpose of these meetings is to answer questions and encourage non-participants to enroll in the retirement plan, so they have a Paycheck for Life® and help participants build their 401(k) assets, as well as manage other assets that are not in the plan.


At your first meeting, it can be difficult, occasionally, to gather the necessary information without feeling as if you’re “grilling” the person. Participants may not want to reveal too much about themselves; however, you need to get as much information as possible. By starting a conversation with your client, you can help to put them at ease. You've already built some trust at the enrollment meeting, but you have an opportunity to build on that one on one while you collect essential data.

  • Create a Dialogue. Ask questions, but don’t be afraid to tell the client about yourself, too. For example, you have a son or daughter who is just applying to college and the client’s child is now a freshman at the local university. Don’t hesitate to ask how he or she likes the school. Sharing a little bit about yourself connects you  on a deeper level. If they know that they can trust you, they will share more information with you.
  • Don’t Sell Them. It’s important to put your client at ease. They may feel funny telling you about their personal financial situation. If they are like most other people, their retirement savings have been volatile the past few years. Let them know that you genuinely want to help them achieve a brighter financial future, a paycheck for life.
  • Work From a Paper, But Don’t be Afraid to Go Off Topic. It is best to have an outline of questions that you need answered, but if you get off topic, that’s alright. It’s better for your relationship to get to know the person. However, don’t stray too far so that you end up talking sports or politics for an hour. The client’s time (like yours) is valuable. There’s a delicate balance between building trust and wasting time, but it is essential not to make the client feel rushed.
  • What Aren’t They Telling You? A large part of communication is not verbal. Make sure you can tell the difference between an anxious client and one who is in a hurry. Similarly, try to control your body language. If the person is talking about something important, nod your head as a way of prompting him or her to continue. Don’t cross your arms in front of your chest, even if the conversation is not going the way you want it. This is a signal that you are uncomfortable or bored and literally creates a barrier between you and the person. Keeping an open posture, facing them with your arms at your sides (or discreetly taking notes on important points), is an invitation for them to keep talking.
  • Be Prepared to Listen. You should be listening to everything the person has to say. That may sound obvious but most people are not active listeners. Ask questions, don't interrupt, and if someone pauses to think just listen for them to begin again. Make eye contact and be present in the conversation.

Your initial meeting with either a participant or non-participant is a crucial moment. You need to gather their financial information while beginning a long-term professional relationship. Not everyone is blessed with the gift of gab, but if you can master a few tactics, you will be well on your way to putting people at ease, building their trust in you and, hopefully, increasing your assets under management.

Are You Blogging Yet? edit
Friday, April 13, 2012 13:02

It is a common misconception that blogging is a personal, not professional, endeavor. There are a number of reasons why it is not only helpful for financial advisors to blog, but even necessary. Blogging is an accessible way for your clients to stay up-to-date on the latest happenings of your practice. Blogs are also a great way to market to prospective clients. Combined with e-newsletters, blogging keeps your name in front of your prospects, showing them your expertise in retirement planning.

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There is a variety of benefits to blogging, which are outlined below.


Blogging for Current Clients
A blog allows your clients to follow the latest happenings of you and your firm, as well as to keep current on the latest investment and retirement plan trends. Clients can follow your blog in their RSS feeds and be updated automatically as they review the latest postings from other blogs that they follow. If you can’t think of blog topics, consider your current clients as your target audience. Are most of your clients interested in the latest compliance issues or in increasing participation rates? Are they large or small plans? Sending out surveys is a great way to discover what is interesting to your clients. Blog posts can open up conversation between you and your clients and allow you to offer additional services to them.
Blogging for Prospective Clients
Your prospects may not be following your blog, but if you have their email addresses, you should be sending them your e-newsletter. Your newsletter should contain a snippet of your blog post, which will link to your blog for the full article. In this way, viewers can see the entire article and other useful information available on your website. If you’re using an e-newsletter platform, such as Constant Contact, you can see you is interested in your blog and who signs up for the blog.
Although you should focus your blog on issues that pertain to current clients, by having a target market in mind when writing posts, you will be able to attract similar (or new demographics of) clients. E-newsletters containing posts should be a part of your drip marketing campaign since they will keep your name in front of your prospective clients. This creates top of mind awareness, and when they need a retirement plan advisor, they will be more likely to call on you.
Blogging for Unknowns
Although your blog is geared towards clients and prospects, it may attract people that you don’t even know. Search engines, such as Google, increasingly rely upon blogs to provide information. If your blog contains relevant information regarding fee disclosures, your post may show up in the results of people searching for more information on the topic. If those people are plan sponsors looking for a new retirement plan advisor, they might contact you for more information, a meeting, etc. If you optimize your blog for search engines, your post could show up in the top results of Google, Bing, Yahoo, etc. When managed correctly, having a blog also pushes your website up in search result rankings. If people are searching for a financial advisor in your area, this could give you a huge advantage over your competition.
Popular blog platforms include Blog.com; Blogger, owned by Google; SquareSpace.com; WordPress.com; Weebly.com; TypePad Micro; Live Journal; Jux and Posterous Spaces. Most of these platforms are free.  
Having a blog not only helps you to retain current clients, it also aids you in marketing to prospects and unknowns. Blogs can drive visitors to your website and have a number of advantages. Posting regularly will increase your chances of gaining more visitors and, potentially, more clients. If you don’t have a blog yet, you should consider starting one. 
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