With fiduciary rule's demise, plan sponsors shift focus

When Fidelity released its annual Plan Sponsor Attitude Study last summer, industry was in the thick of implementing the Labor Department’s fiduciary rule.

The regulation’s impartial conduct standards had already been implemented, making advisors and brokers to 401(k) plans with less than $50 million in assets fiduciaries and requiring them to put the best interest of plan sponsors and participants before their own.

The extent of the regulation’s impact and reach—to say nothing of years of media and industry attention to it—understandably captured sponsors’ attention.

In 2017, nearly four in 10 sponsors said the reason they hired a plan advisor was to help meet sponsors’ statutory fiduciary obligations under the Employee Retirement Income Security Act.

Fast-forward a year and the fiduciary rule is off the books. In Fidelity’s 2018 survey, released last week, only 14 percent of sponsors said their top reason for working with an advisor was fiduciary compliance.

“There was massive awareness of fiduciary concerns last year,” said Jordan Burgess, head of specialist field sales for Fidelity Institutional Asset Management’s DCIO business.

Even before the fiduciary rule, sponsors of retirement plans were fiduciaries, just as they remain even after the rule was scrapped.

As fiduciaries, sponsors are required to monitor their service providers. Under the fiduciary rule, they were required to know what plan advisors and recordkeepers were doing to comply, or face a potential breach under ERISA.

In the run up to the rule’s implementation, plan advisor specialists took a lead role in educating sponsors on the rule, said Burgess. That outreach undoubtedly colored sponsors’ attitudes, driving their imperative on fiduciary compliance.

“The best plan advisors were jumping in and saying ‘I can help you understand this rule, and I can play a fiduciary role for you,’ ” he said.

While proponents of the rule—many of whom were plan advisor specialists set to prosper from higher demand for their services—may bemoan the fiduciary rule’s death, data in Fidelity’s most recent survey suggests the rule is benefiting sponsors’ approach to plan design in unintended ways.

Of the more than 1,100 sponsors surveyed—Fidelity reached out to plans inside and outside its recordkeeping arm—the top concern for plan sponsors is whether their plan is adequately designed to prepare workers for retirement.

“This is a pretty significant shift,” said Burgess. “I would suggest there is a broader trend going on—and it’s a really positive one. More and more sponsors are saying they want to make sure their plan is working well for employees. I think we can infer from the data that more sponsors have been educated. Advisors have played a big role in that, which is an exciting thing.”

Less turnover expected as 92 percent of plans work with an advisor

Three-quarters of the plans Fidelity surveyed have less than $250 million in assets. More than 50 percent have between $50 million and $250 million, what Burgess calls the “traditional plan advisor sweet spot.”

In the survey’s nine-year history, more plans than ever report working with an advisor—92 percent. It is the first time in the survey’s history that sponsors’ top concern is plan outcomes. Along with fiduciary compliance, fees had been front of mind for employers in recent years.

That the fiduciary rule has been taken off the books may be making sponsors less apt to fire incumbent advisors or brokers. Last year, nearly four in 10 sponsors said they were actively looking for a new plan advisor—an all-time high in the survey’s history. This year, 22 percent claim to be actively looking to switch advisors, still historically high, said Burgess, but down markedly.

While higher turnover rates could benefit proven advisor teams, this year’s data shows there is still room for prospecting: 30 percent of surveyed sponsors said they are not satisfied with their current advisor.

When they are looking to change advisors, sponsors’ reasons range from advisors not providing the value to justify their costs, to advisors not willing to take on fiduciary responsibilities, to the need for more knowledgeable advisors. While sponsors may be less focused on preparing for changes under the fiduciary rule and plan costs, they still expect advisors to educate on regulatory changes, help minimize costs, and help sponsors manage fiduciary responsibilities and risks, according to the survey.

How sponsors are improving retirement readiness

Sponsors said the motivation behind changes to plan design or investment menus was to increase participation and savings rates. Nearly 40 percent added or changed matching contributions, compared to 25 percent last year; 56 percent of sponsors said the change was to increase participation rates; and 47 said the change was to increase savings rates.

A quarter of plans added automatic enrollment in this year’s survey, compared to 41 percent in 2017. About half of sponsors in the survey now use auto-enrollment—a half-empty, half-full scenario, says Burgess.

Fidelity’s data on the impact of auto-enrollment on younger workers’ participation rates is nothing short of dramatic. Of plans that auto-enroll workers, the participation rate among workers age 20-29 is 84 percent. For plans that don’t auto-enroll, the rate for the cohort drops to 31 percent.

“There’s a big chunk of plans that don’t have auto-enrollment,” said Burgess, who insists the portion of plans without automatic features presents marketing opportunities for advisors. “With retirement security, we know it comes down to a simple math equation. You have to start saving early.”