Delivering Total Plan Care
QDIAs Shift the Focus from Picking Funds to Plan Consulting
By George Goros
Target date funds haven't changed the retirement landscape — they became the landscape. DC Edge spoke to retirement plan experts John Pickett, David Altimont and Kathleen Kelly about QDIA consulting.
Qualified default investment alternatives (QDIAs) are a fact of life. Six years after the Pension Protection Act (PPA), upwards of 90% of plans use a QDIA, with the vast majority choosing target date funds. QDIAs haven't changed the landscape—they became the landscape.
They have also dramatically changed the role of financial advisors who specialize in retirement plans. With the choice of a target date fund (TDF) nearly "automatic" for many of today's plans, some may ask whether they need an advisor to help them with the choice. However, the reality is that a growing need has emerged for retirement plan specialists who can help plan sponsors navigate the wide variety of TDFs and help them understand how and why the difference between them matter.
This growing need offers retirement plan specialists a new way to evolve their practice, add value for clients and distinguish themselves in an increasingly competitive field by taking a more holistic view of their clients' plans. As John Pickett, Senior Vice President and Financial Advisor at CAPTRUST, says, "The idea of just being the investment consultant that just picks funds is last century. It's really total plan consulting."
Five Ways to Demonstrate Value
The PPA had several goals, including increasing participation in corporate retirement plans and ensuring that participants are in more suitable investments than they may have been if left to their own devices. Clearly, in this regard at least, PPA is working. "I would say close to 100% of our clients utilize a QDIA," said Kathleen Kelly, Managing Partner at Compass Financial Partners. It's easy to see why.
But initially, some advisors viewed TDFs as problematic for their business since by managing asset allocation and diversification through a single investment, it may appear that the funds did their jobs for them. But this is only true for advisors who defined their value strictly in terms of picking funds. The three leading retirement plan specialists DC Edge spoke to for this article recognize that today's plan sponsors need far more from their consultants. They offered five steps for advisors to evolve, add value to clients, grow and distinguish themselves when working with QDIAs.
1. Help Plan Sponsors Understand Their Needs
"About 50% of our clients hired us because they were ready to make a change in their current plan provider," says David Altimont, Senior Vice President and Practice Leader at Lockton Investment Advisors. "But we realize that most of the people we work with wear many hats. It's very difficult for them to be an expert in all the areas they have responsibility for."
In practical terms, that means many clients have a clear idea of what they don't like and less clarity about what they need. Simply finding an alternative that addresses their current pain points, such as fees or performance, may yield quick success, but it does not serve the clients or their participants—and it may ultimately undermine a long term relationship. That's why the first step is to gain a thorough understanding of the current plan.
"We spend a lot of time getting to know the underlying needs of our clients, the demographic trends within the plan, and the behavior of their participants. That's where we bring value," adds Kelly. The plan sponsor may be unaware that their participants have different needs than the general population. That's why advisors need to dig deep into whether the plan's participant base has unique characteristics around retirement age, earnings, access to traditional pensions and so on.
Our advisors agree that the next step is helping the plan sponsor understand their philosophy. What do they see as the goal for their defined contribution plan? Pickett describes the discovery process: "We help them focus. What are you trying to do with your 401K? Is it a wealth accumulation plan or is it a retirement plan? If they say, 'Well, we did away with the DB plan ten years ago, so it's the only plan we've got,' I say, okay, that means it's a retirement plan. It's there to provide food, clothing, shelter and medical expenses in retirement. Suddenly they understand and their eyes start to open."
If the client does not have an investment policy statement that captures their philosophy, it is time well spent helping them develop one. It not only clarifies the search parameters for a new provider, it sets expectations around performance, cost and retirement replacement ratios that may reduce problems later on.
2. Narrowing the Field
The population of target date funds has roughly doubled since the advent of the Pension Protection Act. In addition, there are numerous customization options and methodologies available. The difference between the choices can have a considerable impact on participants. Financial advisors with a well thought out evaluation process in place have a major advantage over those who do not.
"It became painfully clear to plan sponsors after the Financial Crisis that not all target date funds are created equally," Kelly observes. "There does need to be significant investment of time on the part of a fiduciary committee to select the most appropriate target date fund for their population."
Part of the selection process is education, which is an integral component in helping sponsors decipher which options best fit. The advisors we spoke with found that their clients were more inclined to work with them when they helped cut through the jargon to arrive at the solutions that are most appropriate for their retirement plan.
By offering cutting-edge research analysis, advisors can make a significant difference in helping sponsors make good decisions when choosing among a host of similar TDFs and other investment options. "There are a lot of variables," says Pickett. "We employ both quantitative and qualitative analytics on the target date fund and the construction of its glidepath. We analyze the management approach, whether they're using internal proprietary sub-funds or externally managed sub-funds." Here is where the work done in Step One on understanding the plans' needs, its participant base and the investment philosophy begins to shape the selection process. "By now they understand the participants and the goals, they understand the whole question of 'to versus through', they understand the diversification and the underlying allocations themselves. They understand whether they are best served by an indexed approach, by active management, or a hybrid approach." said Kelly.
At this point, the process should have zeroed in on a small handful of funds worth analyzing in depth before making a decision. When it comes to making the final recommendation, advisors should pick the fund that fits—not the fund that has lots of impressive, but unnecessary, bells and whistles.
According to Altimont, "We have never felt that we had to justify using an off-the-shelf target date fund [as opposed to a customized solution] if the research that backed up that decision with was well thought out and we did a proper job of explaining the recommendation to our client." If there was a common theme among our advisors on this point, it was that shifting through the TDF universe was complicated enough—there is no need to add complexity to add "value."
3. Ins and Outs of Implementation
The final selection is not a simple process based on any single factor. Fees, ease of implementation, participant communications support, and any number of plan specific requirements can tilt the choice one way or another. "We work with our plan sponsors to understand what they've done in the past, what's worked, what hasn't and how fee conscious they are," says Kelly.
Working through the complexity side-by-side with the client demonstrated a commitment that goes well beyond simply ringing up the sale. It demonstrates that the advisor is a partner for the long haul. As David Altimont frames it, "We want to be a subject matter expert and a co-fiduciary that sits at the table with the investment committee and helps bring the best solutions possible to the table for their company's retirement program."
One hurdle that should not drive the choice, according to Kelly, is a particular target date fund's availability on the record keeper platform. "Just because it's not available on the platform doesn't mean it can't be available on the platform," she explains. "It often just comes down to getting the right people talking on both sides to establish a selling agreement and contract so that product can be placed on the platform."
4. Building Out the Menu
Total plan consulting means just that: the total plan, including the investment choices beyond the QDIA. Our advisors agree that no target date fund is perfect for every participant, but they are likely to be suitable for the great majority. "Ideally, we would like to see 90% plus usage of the QDIA within a plan," says Altimont. He also believe that a sophisticated target date fund can include a broad range of real assets, international equities and fixed income asset classes within the glidepath, making them an ideal source of diversification.
"However, for the small percentage of sophisticated investors in the plan, we work with the plan sponsor to make sure there's a range of options available, including some of the more unique investment categories for those investors who want to strategically select them," says Altimont.
5. Driving Participation
The best investment menu in the world is a failure if it does not reach participants. Auto-enrollment into the default option only reaches new hires. Talking to clients about reenrollment—which is typically more well received by participants than most plan sponsors expect - can be one of the last pieces of total plan consulting when working with QDIAs.
"It's definitely not one of those one-size-fits-all approaches," admits Kelly, "but I think in many instances, if the plan sponsor has the conviction in a target date fund, it can be a very, very good option for consideration."
"Plan sponsors have varying views on reenrollment," adds Pickett, "often influenced by the degree of paternalism they feel and their historical experience." For plan sponsors disinclined to undertake a reenrollment, consulting on participant communications, and in many instances holding participant meetings, is another value add.
Altimont considers participant meetings a key part of their value proposition. "Our approach is to make sure that we spend the majority of our time in meetings with participants, educating them on the value of the target date funds and making sure that they clearly understand how target date funds work and what the advantages are to them," he says. John Pickett CapTrust Advisors, LLC
A New Value Prop
Retirement has changed dramatically in the last few years, driven by regulation, demographics and the economy. Plan sponsors simply do not have the resources to keep up with this growing complexity. Guiding them through their QDIA selection places you at the very heart of today's retirement and delivers the value that plan sponsors need.
*as of December 2012
The information contained in this material is derived from third-party sources deemed reliable, but BlackRock does not guarantee the completeness or accuracy of the information. The material is provided as an educational tool and should not be considered investment advice. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. BlackRock is not engaged in rendering any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice.
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