Our Perspective
Employer sponsored retirement plans are an indispensable benefit, providing employees a tax-advantaged method to accumulate retirement savings. For decades, retirement plan participants had complete discretion over how much to save and which investments to invest. This traditional approach is often accompanied with an investment professional providing investment education. Participants who have little investment experience make two major mistakes:
They don’t save enough (most important)
Behavioral mistakes – they make major asset allocation changes at the wrong time
Participants who focus on individual fund performance at the expense of asset allocation, portfolio diversification, portfolio rebalancing and saving rates are making errors that have far-reaching implications. That is not to say that fund performance is not relevant, but our analysis suggests it is a much less powerful variable compared with asset allocation and most of all, higher savings rates. Participants need advice to assist with investment and savings decisions.
Fortunately, legislation exists which allows Plan Sponsors to receive a safe harbor with the addition of participant level investment advice and plan design elements. These safe harbor plan design options include automatic enrollment and escalation features that create positive inertia, so employees become participants with appropriate savings rates. Lastly, new safe harbors provide professional investment advice services to participants.
Participants tend to fall into one of three categories:
“Do it myself”
“Tell me what to do”
“Do it for me”
Do It Myself…..Self-Directed (Guidance)
Investment professionals provide guidance to participants. Financial guidance is the bridge between education and advice. The focus is on how to make informed investment decisions as opposed to what to invest in. It goes deeper than education to give people frameworks, considerations and processes to make informed decisions, but does not cross the line into advice where an advisor provides specific investment advice. This guidance does not provide fund-specific recommendations and does not constitute investment advice.
Tell Me What to Do…..(Advice)
Specific investment advice is offered to participants of the Plan. The advice could include investing in a risk-based model portfolio constructed from the core investments of the plan or customized allocation.
Investment Advice is delivered “in person” through an investment adviser, computer software or a combination of both. Typically, a Plan Sponsor determines if they want to offer advice to participants and then determines if they want advice delivered on-site through an “in person” investment adviser. Plan Sponsors need to understand the desires and needs of their employees and how the proposed services are going to be delivered.
Do It For Me.….(Management)
Typically, participant account management services pick up where investment advice falls short. The distinct difference between advice and management comes with the implementation of advice and discretion. The proverbial rub against “advice” is participants don’t always implement the advice.
When participants engage a “managed” account solution they give up control over the management of their account. This means a participant’s investment usage and asset allocation will change over time without their consent for every transaction. The investment manager has discretion over their account.
Delivery and Payment of Participant Level Services
Participant level services can be delivered in person, over the phone, using video software or adding the service through your service provider (record keeper). Some service providers outsource participant level advice and management services to third party providers, whereas others will provide it directly. A key consideration is evaluating the portability if you change service providers.
Furthermore, Plan Sponsors can engage with a third-party investment advisor that acts as an ERISA fiduciary to participants. This approach provides greater flexibility, portability, and personalization.
Participant level services can be offered to all participants of a plan or only those who select the service. If a Plan Sponsor decides to offer investment advice or management services to all participants, payment options include:
by the company
from participants
or a combination
Participant level services can be offered as an add-on where each participant decides and pays extra for the service. The landscape of participant level services is complex and we recommend working with an expert to evaluate which option is best for your organization.