Recordkeeping Survey

State of the Industry

By Extension

Why plan sponsors may want to evaluate­ their recordkeeper’s partners

The employer’s role in plan participants’ retirement saving process has broadened. Today, many employers offer ancillary aid to improve workers’ financial wellness and, thus, their ability to save in the plan. To supply for that plan sponsor need, increasingly the recordkeeper turns to outside service providers, via either partnership or acquisition, in order to expand what it has to offer.

The rise of preferred providers has been a result, according to sources, and reflects both plan sponsors’ and recordkeepers’ growing recognition of workers’ need for wellness, and of technology’s ability to deliver solutions. 

While sponsors were interested in both financial wellness and technology before the pandemic, COVID-19 accelerated their demand for such offerings from providers.

“Firms are looking for unique ways to deliver their services in a more technologically enhanced way,” says David Swallow, managing director, consulting relations and retention at TIAA in Tampa, Florida. “It’s not new competitors but new capabilities being provided by other parties that come in to support the marketplace.” 

These solutions might focus on paying down student loans or learning how to budget or building emergency savings—there may also be co-fiduciary partners that allow plan sponsors access to 3(16) services or managed accounts via a 3(38) provider. For older participants, there might also be an emphasis on draw-down strategies and planning for income in retirement. As more companies offer high-deductible health plans, they are looking for health savings accounts to help employees manage current and future medical costs.

Such additional benefits might be particularly appealing to plan sponsors as a differentiator for job applicants in today’s competitive employment market. A Bank of America survey of 834 employers last year found that more of them—46%, up from 40% in 2020—are expanding the types of financial wellness support they offer. 

When plan recordkeepers partner with firms, across the spectrum of offerings, they often integrate the service with the plan, meaning participants have access to these providers through their web interface or single log on. 

For example, Milliman Inc. and Transamerica each recently announced a partnership with SecureSave to provide an emergency savings program to retirement plan participants. Meanwhile, John Hancock has partnered with Signature Fiduciary Connect to supply more support services for plan sponsors’ administrative and fiduciary duties.

It is up to plan sponsors to understand which, if any, third-party providers their recordkeepers work with, which services they outsource, and how they manage that relationship, says Chris Dall, vice president, senior product leader at PNC Institutional Asset Management in Philadelphia.

“We recommend that our clients’ recordkeepers are reviewing third-party vendors on an annual basis for changes that might have an impact on plan sponsors and their participants,” Dall says.

Conducting due diligence on third-party providers should be an important component of the recordkeeper search, he adds. “While contracting a third-party to provide certain services is not a negative on its own, we’d see it as a red flag if a recordkeeper did not demonstrate strong control processes for the use of such third-party vendors.” 

Among the factors to focus on while conducting due diligence on a third party are whether it meets a need or solves a problem for the plan sponsor, whether the vendor is financially stable, and how it has performed for other plan sponsors, says Stuart Robinson, CEO of ShareBuilder Advisors in Seattle. This may require checking the vendor’s references. 

Plan sponsors should also inquire as to possible recourse if the solution does not perform as advertised and ask whether their adviser has other options that might be more suitable, Robinson says. In addition, asking the following questions when evaluating a third-party provider can help you determine the potential fit:

Are these services in-plan or out-of-plan? 

Important for plan sponsors to keep in mind when evaluating third-party services is whether they are offered integrated within the plan or outside the plan. There are pros and cons to each, but the sponsor needs to understand the distinction.

“If it’s in-plan, there’s a fiduciary obligation [to review it], while an out-of-plan solution may not have a fiduciary obligation attached to it,” Swallow says.

When the recordkeeper brings in third-party providers, the sponsor should ask it about its relationships with those providers, plus do some due diligence of its own, says Wade Dykema, director of sales at Alerus Retirement and Benefits in St. Paul, Minnesota. “Don’t ever take your hands off the wheel completely,” he advises plan sponsors. “You have to ensure that everything being brought to you is what you want before you make it available in the plan. You have to stay engaged.” 

Besides tools and education aimed at meeting employees where they are in their financial journey, recordkeepers are exploring new and different ways to connect with plan participants, Swallow says.

Today’s environment is different from that of a decade ago when it comes to participant engagement, Swallow says. “Now it’s about finding other methods or ways to meet with participants, whether that’s in person, digitally or through phone or video. It’s looking to other media to deliver and interact with participants.” 

Is this provider selling anything to plan ­participants? 

The answer to this question should be “no,” Dall says.  “Organizations should look for financial wellness offerings that are engineered to not do anything other than provide employee education,” Dall says. “Using education as an opportunity to sell additional services distracts from the training and decreases the likelihood that employees believe the educator is working in their best interest.” 

What is this provider’s approach to cybersecurity? 

Many third-party providers are taking advantage of technology to deliver their services. While that has many benefits in terms of the customization and integration of specific products, it also potentially opens up participants and plans to new cybersecurity concerns.

“Given that this has been a focus area for regulators, the heightened importance and scrutiny [of] cybersecurity will continue to make this a growing area of focus for plan consultants, clients and fiduciary insurance companies,” Swallow says.

The Department of Labor issued guidelines last year outlining best practices for plan sponsors in evaluating all service providers that have access to participant data, including third-party providers. Those best practices include understanding the provider’s cybersecurity measures and processes. 

“While recordkeepers may have the size and scale to invest in a strong cybersecurity program, a smaller, third-party vendor might not have the same resources,” Dall says. “If that third-party vendor is receiving participant data from the recordkeeper, a malicious actor might see that as a weak spot worth attacking.” 

Besides to prevent hackers from accessing their plan’s data, sponsors should also ask recordkeepers about their plans for disaster recovery and their backup procedures if a system goes down, Dykema points out.

Is there a human element? 

Despite the emphasis on technology, plan sponsors are still looking for partners that also offer a human component alongside innovative technology. 

“Great providers marry that high-touch, personal-service delivery model with robust technology that supplies participants and the sponsor with the tools they need for success,” says Dykema.

Plan sponsors’ desire for personal connection extends beyond participant communications, Dall says, noting that sponsors are placing a greater emphasis on service than in the past. Because recordkeepers are often seen as an extension of the plan sponsor’s team, it is important that the parties work together well to solve problems quickly.

“Everyone’s patience is shorter since the pandemic,” Dall observes. “So, if you have an upset participant, that person is getting angrier faster, and that’s not something plan sponsors want. They want to make sure they have a responsive recordkeeper.” 

Ideally, he says, that means there is one person they can get in touch with who knows the account, rather than a call center where the sponsor has to reintroduce itself to a different representative with every phone call.

How will it integrate with the existing plan? 

As companies continue to undergo digital transformation for payroll and other human resource functions, any new products or services must integrate with their existing systems. Some plan sponsors prefer 360-degree integration—meaning the payroll provider’s and recordkeeper’s systems communicate with each other—while other sponsors are OK with 180-degree integration, which allows for only one-way communication, Robinson says.

Will plan participants use it? 

Even the most well-designed product or service will not move the needle on retirement outcomes if the participants fail to engage with it. Plan sponsors should think about their participant demographics and the various groups’ needs to make sure a new offering is truly a good fit, Dall says. 

“With five generations of Americans in the workforce, each with different degrees of technology expertise, it’s important for technology-based solutions to be easy to use, no matter the person’s skill level,” he says. “When plan sponsors are evaluating solutions, they need to keep in mind that, while fancy bells and whistles can be exciting, it’s more important that the technology is easily understandable and accessible by your workforce. Otherwise, they won’t use it.” —Beth Braverman

Recordkeepers Meet an Emergency Savings Need

Retirement plan sponsors have seen that employees need to be prepared for short-term shocks to their finances in order to have overall financial wellness and be comfortable saving money for retirement.

“Eye on Systemic Change in the Retirement Industry,” a study from national nonprofit Commonwealth and the Defined Contribution Institutional Investment Association’s Retirement Research Center, reveals that retirement plan recordkeepers have joined in addressing the emergency savings crisis. A series of interviews with nine of the largest recordkeepers in the U.S. found that eight of them either offer or say they plan to offer an emergency savings product.

According to the study report, although recordkeepers’ primary objective is to support retirement savings, they increasingly understand that other aspects of a participant’s financial life are crucial to that person’s ability to save for retirement. Commonwealth says its previous research supports this conclusion, finding that plan participants who have not saved for emergencies are twice as likely to tap their workplace retirement savings account.

Two recordkeepers emphasized that the offering of emergency savings products represents a shift in how recordkeepers see their role in ensuring financial security for their participants. One said it took the firm “more than a year” to be comfortable saying that emergency savings should come before retirement savings, but it realized building the former was a way to ensure that the retirement plan is not a “revolving door” for loans and withdrawals, the report says.

Another interviewee noted that the retirement industry’s focus is broadening to consider more aspects of financial wellness, including emergency savings.

The study also included interviews with seven plan sponsors across a variety of industries that collectively employ approximately 870,000 workers. A plan sponsor with a majority of low- and moderate-income workers said it wants to support them in building emergency savings so they can avoid taking out employer loans or charging more to their credit cards.

Recordkeepers indicated that their primary goal in offering emergency savings solutions is to improve participants’ retirement readiness—over half named that goal, with several calling it their top goal. Still, to meet plan sponsor client demands and to remain competitive with recordkeepers that offer these products were also listed as motivations.

While the recordkeepers said the need to help employees build emergency savings was obvious, their answers to “What is emergency savings?” and “How much should be saved?” varied.

The report recommends employees start by saving for frequent expense shocks to build short-term financial stability and then for larger income shocks; this aligns with other industry research. “With this framing, plan participants who cannot afford to save for many months of expenses can focus on short-term savings, which they can tap and rebuild without worrying about dipping into a fund that’s supposed to be left untouched,” the report says.

There also was no consensus about how emergency savings solutions should be offered. Most of the recordkeepers leaned toward out-of-plan solutions, though several said they would offer both in-plan and out-of-plan solutions to meet participant and sponsor demand. Plan sponsors were split on their preference for in-plan vs. out-of-plan solutions. The report suggests that whether they are leveraging an existing product, partnering with a third party or building a new product in-house, recordkeepers should keep a plan sponsor’s key considerations in mind. These were: the need to act as a fiduciary for the employees; employee engagement/utilization; cost implications; and the importance of limiting the total number of benefits vendors.

Of the seven sponsors interviewed, more than half said they intend to offer emergency savings in the near term, either through their recordkeeper or credit union.—Rebecca Moore