The intermediary factor
Common wisdom once had it that financial planners would
play less and less of a role in the pensions marketplace,
as plan sponsors and vendors increasingly began to interact
directly. In fact, the growing complexity and choice in the
defined contribution marketplace has had quite the opposite
effect: financial planners with DC expertise are carving
out an ever-growing role, most notably in the small to
mid-sized plan arena. Two such financial planners, Sheldon
Schumaker, managing director of PruneYard Financial Group
(affiliated with D.E. Frey & Co.), based in Campbell,
California, and Romaine Macomb, of Essex, CT-based John W
Rafal & Associates (affiliated with Raymond James
Financial), discussed how they add value in the DC arena
with three executives from American Skandia, one of the
nation's leading financial services organizations:
Christian Thwaites, senior vice president; Kimberly
Anderson-Bradshaw, vice president and national sales
manager, qualified plans; and P. Cosmo Smith, program
manager, qualified plans. The interview was chaired by
Charles Ruffel, editor-in-chief of Plan Sponsor.
At one stage, it looked as if financial advisors would be
disintermediated in the defined contribution marketplace.
Instead they have become more important, and visible, than
ever before. Why?
Firms like ours bring two strengths to the table. We're
advisors to both the plan and the participants. As far as
the plan sponsor is concerned, the choices they face when
it comes to their DC plan are difficult and complex ones.
Whether they are grappling with investment policy, fund
selection, monitoring that selection, or whatever, they are
struggling to meet their objectives in a cost-effective
fashion. They need an independent resource to do that, and
we are that resource.
Do you need to be brought in at the outset of a new
We come in anywhere the client needs it, and our range of
clients spans small start-ups to much larger plans.
Sometimes we're brought in at the very beginning, sometimes
we're brought in when there's a problem, and sometimes
we're brought in because a plan sponsor senses that their
provider is no longer giving adequate service. We come in
as consultants and fix the problem. We see ourselves as a
quarterback--we're not the provider, we're not the
recordkeeper, we're the advisor.
The market today seems to recognize the value of having
such a quarterback. There are some plans, perhaps
particularly in the large plan arena, where plan sponsors
don't feel they need advisors. But generally, the larger
complexes that are directly selling into the small- and
mid-sized arena are unable to deliver the kind of support
and personalized attention that is now being demanded.
What sort of tools and skills do you need to be a financial
advisor in the DC arena?
Obviously, you need experience with and understanding of
the whole range of problems that a plan sponsor faces when
creating or fine-tuning a plan. However, that doesn't mean
you have to be an actuary or an ERISA lawyer--the key role,
again, is that of a quarterback, so you can access
specialist outside expertise if and when the client
requires it. For some clients, we act as an extension of
their HR department: others want less in the way of HR and
more in the way of financial expertise. We have to be able
to do both, and in a disinterested way.
As a consultant, you have to be able to deliver what the
client wants. For instance, as participants began to demand
education, they found they couldn't get their questions
answered by some person in a call center. So they began to
knock on the door of the company's HR person, where they
couldn't get any answers either. In the scenario now
unfolding in corporate America, there needs to be someone
who provides the hands-on education, who meets with the
employees, who holds the enrollment meetings, and who
answers employee questions, ultimately educates them.
Is it true to say that the full-service vendors acting
alone can't be that resource, or at least not
In general, I think it is fair to say that the industry has
under-served employees as far as education goes. They've
delivered tools, they've delivered something of a process,
and then they've left participants to make asset allocation
decisions and ultimately fund selections. In the final
analysis, that hasn't cut it. Participants need personal
financial planning, and, in most cases, they need access to
a financial planner to do that effectively. And this is not
just for highly-compensated individuals. We're talking
about real money for real people who have real problems to
solve. They need to look beyond their 401(k) into a system
that can integrate their entire financial status. Why does
this industry see high participation rates but pitifully
low deferral rates? It's because people aren't being
properly advised. So above and beyond what the planner can
do for the plan sponsor in the quarterback role, they can
also deliver the up-close, in-person attention that
employees are just not getting now and so desperately
In addition, using an advisor allows a plan sponsor to deal
with the same person for the duration that initially shaped
the plan. By contrast, the direct salesperson who sold you
the package may never be heard from again. The advisor
provides a level of service that is extremely vital to plan
sponsors and their employees.
As financial advisors, one of the challenges you must face
is deciding where your primary expertise lies--in assisting
the plan sponsor in plan choice and design, or in educating
Of course, the two areas are connected, since it is of
primary importance to a plan sponsor that participants are
properly educated. That said, you have to be in a position
to fulfill both tasks if you're going to service the DC
arena as a financial advisor. You need to totally
understand the ins and outs of the business, plan design,
what asset managers are offering, and so on. Indeed, it is
a commitment, but you can do both.
What happens at the end of the equation when somebody with
$400,000 in their 401(k) plan retires? Presumably the
provider would like that to flow automatically into some
vehicle it has created, but from your standpoint there
might be better advice to give than that.
That's one reason why the good financial advisor has to be
totally free from bias. We're not controlled by anybody,
and certainly not by our providers. What's best for the
client is what's important.
Of course, what's best for the participant is not always
crystal clear. But it now seems generally accepted that
plan sponsors have some fiduciary responsibilities in
ensuring an educated participant base.
There's certainly a fiduciary liability around employee
education and providing the right kind of guidance--not
only within the framework of a plan but even within the
framework of an individual's entire financial planning. And
as the complexity of fund choice grows and asset balances
surge, the fiduciary issues themselves become more
Certainly, we're now finding employers are extremely
concerned about their employees' education, and aware of
the fiduciary issues they may face in this regard. That's
often where we come in. Employers are looking for someone
independent who can oversee the education process, from the
moment an employee joins the firm to the moment he or she
leaves, in a completely independent way.
And that independence allows them to put together the best
possible team for the plan sponsor--investment management,
education, administration. And the plan sponsor doesn't
have to oversee every detail. American Skandia only sells
into the DC arena through intermediaries, and it's because
this relationship paradigm works so well.
In fact, having a financial advisor in the picture is
actually--from a time constraint viewpoint--of real benefit
to the provider as well, because it stops them from having
to be the resource the plan sponsor goes to every time
there is a question. Instead, we become that resource, and
that's a role we are in fact better suited to play.
Let's say I'm a plan sponsor at a small plan who has an
existing bundled provider and it's not working, and I learn
about this breed of specialists who focus on 401(k) plans.
How do you explain to such a prospect that bringing you
into the picture is not going to bring a totally different
cost structure to bear on the plan, a cost that the plan
sponsor will have to bear?
Cost is never the first issue I address. You first need to
find out what the problem is, if there is one, or what the
plan is trying to achieve. If they are used to a 1-800-NO
SERVICE type of vendor, you have to take them along a new
path before you even talk about cost. And there are
instances when we have changed a plan completely and ended
up saving the plan money--sometimes, when you look at what
the total cost is for the plan now and what the total cost
will be when our changes are made, clients will actually
save money, increase performance, increase communication,
meet 404(c), have an investment policy that they've never
had before, and actually save dollars--real dollars. And
let's face it, no incumbent provider will see it as in
their interest to suggest ways to make a client less
profitable for them.
And because of that, there are a lot of plans where we can
reduce the total cost by adding more value.
There are tens of thousands of financial advisors, but how
widespread is DC expertise in that community?
Not widespread at all--demand certainly outstrips supply at
this point. At American Skandia, we have over 40,000
brokers across 1,000 broker/dealers that we work with and
perhaps 10% of them have sold a 401(k) plan, and some of
that 10% have stumbled into the business through their own
customer connections as opposed to by design. There's a
very small number--certainly in the single
digits--concentrating on this niche, and that's because
it's a huge investment in terms of building up a knowledge
base. It's not just about investing: you need, for example,
to know recordkeeping and administration. And the paybacks
are not immediate.
From your vantage point, what are the notable trends in the
Fund choice is the most noticeable: plans, large and small,
are no longer content with funds from a single family.
Also, people don't want to hear things, they want to look
at things. The internet is clearly the solution there.
To the extent a provider can deliver a solution which
offers access to top managers across asset classes, they
are assured a unique position. Providers have tended toward
offering access to outside funds, but few do this without
some bias for proprietary selections. Most do so on a
Yes. Similar to the defined benefit model, American Skandia
selects managers based on performance and style
consistency. These choices are all from different
investment companies, and provide an initial, unbiased
lineup for advisors and their plan sponsor clients to
include in their plan
How close are we to a situation where a small plan can
access that level of technology and choice?
We're there right now.
There's very little difference in expectation between a
start-up plan for 50 high-tech, postgraduate employees and
a 1000-life plan, and why should there be? There's now a
minimum requirement in the industry, and that minimum
increasingly includes services like internet access. You
can't segment the 401(k) market by size and not provide
services like internet access to any element of it
Of course, some bundled providers do exactly that.
Yes, some do, but they're going against the trend. The
trend we see is acknowledging an era of customer clout,
where small plans can get pretty much all they want if
they, or their financial advisor, knows what's out there.
They can get an array of funds, they can get daily
valuation, they can get high-tech service.
However, nothing is for free, and the perception that you
can get these products and services for free has done a
tremendous disservice to the industry and to the plan
Let's start making the issue of fees more transparent. How
should a plan sponsor be thinking about paying for a 401(k)
There are a couple of ways. First, a plan sponsor can
regard the DC plan entirely as an employee benefit, and
pick up the whole tab. High-tech companies that are very
benefits-oriented often take this path. Then there are
companies prepared to pay for a share of the costs, but
when it comes to added fees for various bells and whistles,
they pass that on to participants.
That fee sharing is happening more and more, we find. One
way that's done is the funds in a plan have a wrap fee
which is an asset-based charge expressed as a basis point
charge or a dollar amount. That is directly debited on a
daily basis, just like expenses are debited from a mutual
fund on a daily basis, from the employee accounts. On top
of that, a recordkeeper or plan administrator may charge
another per participant fee. Overall, the trend we see is
that plan sponsors are increasingly unwilling to pay for
what they get. And a direct employee debit seems to be
One of the issues we are faced with is how best to educate
plan sponsors about what they need to pay for. They need to
understand that running a DC fund is a lot more complex
than mailing your check off and hoping your employees are
doing the right thing. Some things need to be paid for, and
part of our job is to explain the value behind certain
Whether it is about cost or service, a financial advisor
presumably has leverage with a vendor that an individual
plan sponsor does not.
Absolutely. Partly it's because we have multiple
relationships with vendors, and partly because we have
taken the time and effort to understand various vendors and
come to terms with their strengths and weaknesses.
One of the criticisms of defined benefit consultants was
that they had favorite asset management firms, and their
clients would always get steered towards those particular
vendors, sometimes without rhyme or reason. Can that
criticism be made of the DC intermediary?
Some advisors have developed a widespread knowledge of the
industry, and should be able to find the right vendor for
each particular client. When I go into a meeting with a
plan sponsor for the first time, I have no idea what would
be the best vendor for that client.
When it comes to those brokers pushing proprietary product,
they can't really even pretend to be acting as consultants.
They know before their first meeting what they are going to
That's why there are so few true players: not only do you
have to really understand the twists and turns of the
401(k) business, but you have to be able to pick and choose
the best provider to suit a client's particular needs.
And yet the irony is that the 401(k) plan is at the
absolute center of American savings, now and going forward.
So it's where all the action will be.
Perhaps, but for a financial advisor it's a big commitment.
And if it's a small plan or a start-up plan, no one makes
any money for two to four years, depending on the plan.
There are a lot of brokers who aren't interested in that
long term a commitment.
Regarding the long term, do you believe that there are
liabilities, fiduciary and otherwise, attached to 401(k)
plans that are yet to be played out in the market?
I think the 401(k) is a ticking time bomb. Companies were
only too glad to move away from defined benefit plans, and
the net result is that the 401(k) plan has become the
primary savings vehicle by default and not by choice. And
it operates under a set of rules, ERISA primarily, that
were designed for the era of defined benefit, when advice
to participants was not an issue. So you now have the
absurd situation where the employee is begging for advice,
the regulators are prohibiting the plan sponsor from giving
it, and the fund companies are by and large comfortable
with that advice not being given. The fact is there's not
enough money in most peoples' 401(k) funds, and when the
baby boomers retire and find this out, there will be real
Certainly, too many people now are inappropriately
invested. Many go without the right level of
The remarkable thing, if you try and look at this issue
with some sort of perspective, is that the 401(k) business
has been allowed to develop to this extraordinary size
without effectively obliging participants to come to terms
with any sort of intelligent investing process.
That's correct. They make investment changes based on no
real facts and no real information. That's changing slowly,
but it's not changing fast enough. This is why we emphasize
education so much.
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