Art by Dadu ShinThe difference between price and value is a fundamental concept in finance and represents an important lesson for investors to learn. It may be great to find a $5 watch, but the deal is less compelling if the thing doesn’t tick.
As managing principal at Retirement Benefits Group in Irvine, California, Gary Josephs is often called on to discuss how the price/value question applies to employer-sponsored benefits, especially in regard to defined contribution (DC) retirement plans. He says the retirement plan industry’s reinvigorated focus on fees—established in part by the adoption of the fee disclosure regulations under Employee Retirement Income Security Act (ERISA) Sections 408(b)(2) and 404(a)(5)—has been a positive development overall for plan participants, leading to better prices and greater transparency.
However, there is sometimes a tendency for plan sponsors to overlook the best value in search of the lowest price, Josephs says. This is especially true when it comes to services perceived to be highly commoditized, for instance, those of the plan recordkeeper or third-party administrator (TPA). “Some sponsors are worried they will be sued for not pursuing the lowest price possible, but it’s equally important to consider the value one receives for the price paid to a recordkeeper or any other service provider touching the plan,” Josephs says.
He likens the point to the action a sponsor would take if the plan were suddenly sued by a participant or investigated by a regulator such as the Department of Labor (DOL) or the Internal Revenue Service (IRS). “When something goes wrong and you need an attorney to defend yourself, you don’t rush out and scour the phone book for the cheapest service provider you can possibly find,” Josephs observes. “That would be pretty absurd. Instead, you go out and find the best attorney you think you can afford, one you feel confident will be able to deliver the outcomes you’re seeking.”
In the same way, Josephs and other retirement plan benchmarking experts suggest plan sponsors need to remember that the true issue concerning fees is whether the sponsor and its participants receive a good value for their money. This applies to recordkeeping, investment advice and any other services they may be financing with plan and participant dollars.
As for how plan costs are being charged, according to the 2014 PLANSPONSOR Defined Contribution Survey, slightly more than one-third (36.4%) of employers pay the entire tab for recordkeeping services. One-fifth (20.7%) of defined contribution plans in the U.S. pay for recordkeeping and administration as a fixed-dollar cost that is billed directly to participant accounts. This is a more common practice among larger plans, the data show; 38.1% of plans with more than $1 billion in assets bill their participants for recordkeeping costs.
Another 20.6% of plans treat recordkeeping costs as a shared responsibility: Participants are charged some fees directly, while the employer organization also covers a portion of the expenses.
Drivers of Cost
Bob Guillocheau, CEO of Ascensus, in Dresher, Pennsylvania, says ERISA requires a plan fiduciary to act prudently and solely in the interest of the plan participants and beneficiaries when selecting and monitoring service providers or plan investments. A responsible plan fiduciary must also ensure that any arrangement with a service provider is fair and backed by a prudent process, as well as that the same type of standard governs what the provider will charge. However, “reasonable” does not mean “cheap,” so plan sponsors must take care when evaluating the factors that drive their total costs.
Some variables to consider that could make higher prices more reasonable than lower ones, experts say, include the quality of reporting capabilities the recordkeeper brings to the sponsor and to any advisers or consultants serving a plan. Reports from leading recordkeepers allow sponsors to take a deep dive into their plan metrics. That data can be used for a variety of purposes—to flag groups of participants with age-inappropriate asset allocations, for example, or those who contribute to the plan at too low a percentage of their income and thus are unable to receive the full company match.
Some recordkeepers are also willing to take the lead—and co-fiduciary liability—on furnishing all required participant communications and disclosures. Others provide highly capable Web platforms for participants to take hands-on control of their own accounts and manually change things such as the deferral percentage or asset allocation. As Josephs points out, automated reporting and participant support services of this type can free up huge amounts of time and effort that would otherwise be required of the sponsor and adviser to serve the plan effectively.
“Also, there are the education and financial wellness components that can be worth additional investment and that can really move the needle on metrics such as retirement income replacement and overall participation,” Josephs says. “You should be asking: How much customization does the recordkeeper offer in terms of the tools and deliverables used by participants? What is the look and feel of the materials they will supply? Will they promote engagement with the plan?”
He adds, “I’m a big believer in looking closely at the quality of the call centers provided, as well as the Internet tools that are going to be used by participants to engage with and learn about the plan.” Offering these services—and monitoring their effectiveness—can be a key booster of participant satisfaction with the plan. “The reality is that the call centers are still fielding a lot of inquiries from your participants, and that’s one of the primary avenues for participants to engage with their plan. This is the kind of thing that shouldn’t be overlooked as you try to assess fees and value.”
Deciding which of these factors to weight most heavily in the value/price equation will be a matter of employee demographics and business goals, Josephs says. For example, an insurance company with an educated and financially minded work force that is already showing high average salary deferrals into the 401(k) plan may not need as strong a recordkeeper focus on participant education as would a manufacturer with a start-up defined contribution plan. Instead, the tech company could be looking for a recordkeeper that has experience helping high-balance employees in their transition from the accumulation phase into an effective drawdown strategy, or perhaps a recordkeeper that specializes in mobile accessibility of the plan.
The concept of “tracking value” is a matter of assessing the way key plan metrics—the average retirement income replacement ratio or participation rate, for example—change over time and as the plan’s relationship with a service provider develops. Whether a given recordkeeper specializes in one-on-one education, advanced client service portals or other areas, probably the most important insights on value will come from keeping tabs on how participant outcomes progress over time.
The 2014 PLANSPONSOR Defined Contribution Survey results found that only 8.8% of plan sponsors agree that “most employees will achieve their retirement security goals by age 65,” while another 20.4% agree “slightly” with that statement. Stated differently, the vast majority (70.7%) of survey respondents are either unsure or disagree that participants can achieve a secure retirement.
Brian O’Keefe, director of research and surveys for PLANSPONSOR in Boston, notes that moving the needle on participant retirement readiness should always remain the focus in running a retirement plan. “While understanding the value of the services you offer and how your plan compares with similar plans is valuable, it’s also important to not lose sight of the real goal of all plans: to help participants prepare for retirement.”
New and innovative plan design features are most often discussed when a plan is not attaining that goal. However, O’Keefe says, “adoption of some plan design features that would seemingly help improve retirement security looks to have plateaued, compared with the 2013 survey.” Automatic enrollment appears to have remained nearly stagnant, with around 40% of surveyed plans overall adopting the feature vs. 40.8% in 2013, and automatic escalation held steady at approximately one-quarter of plans—25.5% vs. 2013’s 26.9%. Immediate eligibility was in place at 36.7% of surveyed plans, falling slightly from the previous year’s 37.6%; and investment advice availability dropped to 70.4% of plans, from 75.3%.
Additionally, O’Keefe says, “Some other design features that could help improve participants’ readiness and security have what I think are disappointingly low adoption rates.” He notes, though, that these questions were new for the 2014 survey and thus have no trend lines available for comparison. Despite much discussion in the industry about the benefits of re-enrollment, the survey found that 85.4% of plans have not tried any sort of re-enrollment; only 11.9% have tried to re-enroll participants who have previously opted out of the plan. Slightly more than one-quarter (27.8%) of plans have a provision to “true-up” their match, and 7.6% of plans with automatic escalation have set increases above 1%.
Still, from O’Keefe’s perspective, many things are going “right.” More organizations are offering matches—71.8% last year, up from 68.3% in 2013. Also, matches seem to be going higher: 33% of plans offered a default match of more than 3% in 2014, while 28.3% did so the year before. Further, participants seem to be trying to save more. The average deferral rate rose to 6.4% last year from 6.0% in 2013; here, market appreciation certainly helped spur the increase—average account balances jumped to $84,166 from 2013’s $76,045.
However, he observes, “It strikes me that plan sponsors can do more to help participants achieve their goal. Sometimes trying to ‘keep up with the Joneses’ will indeed keep your plan in a good place. But maybe the goal should be more than that.”
“One big trend that’s clearly emerging in the benchmarking area is the migration of employers and plan sponsors toward retirement specialist advisers—in a shift away from the investment consultant mindset,” says Bob Guillocheau, CEO of Ascensus.
“As part of this,” he explains, “the employer can sit down with the adviser and talk more deeply about fees, services and value. You can ask questions such as ‘What are the objectives of my retirement plan? What value are we looking for as the employer? How can we make sure the plan is designed in a way to meet these goals?’”
According to the 2014 PLANSPONSOR Defined Contribution (DC) survey, fund performance review remains the most common adviser-provided service—present in more than 94% of sponsor/adviser relationships. But a solid majority (65%) of plans also now use an adviser to conduct plan provider selection and due diligence, with the highest use of this service seen among midsized (69.3%), large (69.3%) and mega plans (71.5%).
Adviser-driven provider fee analysis is even more common among U.S. defined contribution plans, with 79% of respondents citing this service. Also popular is adviser-provided plan benchmarking, used by 65.8% of plans overall. Benchmarking of this type has yet to become as prevalent down-market, however, as just 52.1% of micro plans use it, compared with 74.9% of mega plans.
Guillocheau underscored the importance of a specialist adviser when it comes to defining and tracking a plan provider’s value. He suggests advanced and digitally enabled plan benchmarking that looks beyond fees to track value; this offering is already well on its way to becoming a best practice in the defined contribution arena, especially at the upper end of the market.