For 2021: Advice worth giving, no matter what the year brings

A fraught 2020 is receding quickly in the rear-view mirror, and though relief is in sight, COVID-19’s effects will linger well into 2021, if not beyond. It’s a decidedly uncertain yet hopeful outlook. For sure, 2021 will offer its share of surprises, but the new year needn’t be just about bracing for market upsets. In fact, 2021 can provide meaningful openings for defined contribution (DC)-focused advisors to productively heighten sponsor-clients’ attention on the big-picture plan issues of participant satisfaction and cost-effectiveness.

In 2021, advisors can find opportunities for clients embedded in a particularly nettlesome plan-management issue: the oft-complex mechanics of plan fees. They also can help sponsors enhance plans to address burgeoning participant interest in secure retirement income and socially responsible investing — worthy goals no matter what the year’s distractions.

Responsible investing: A differentiating offer for plan participants 

In 2020, draft Department of Labor (DOL) rules that, to many observers, seemed to mischaracterize investments shaped by environmental, social and governance (ESG) factors provoked some concern that the hurdles would increase for the investments’ inclusion in DC plans. Concerns eased, however, when the final rules made no specific mention of ESG funds, effectively leaving sponsors a clear path for closely considering their benefits — which are compelling.

In 2019 alone, the universe of ESG funds grew to more than three hundred open-end and exchange-traded funds, with flows into these funds totaling $21.4 billion — four times the record amount set in 2018. More and more, ESG issues are driving asset performance; 84 percent of the S&P 500’s market value now comprises intangible assets affected by ESG factors.

What’s more, the products themselves have been allaying any lingering concerns that an ESG focus inevitably sacrifices performance. During 2020’s COVID-driven market turmoil, 72 percent of ESG funds had year-to-date returns ranking in the top half of their Morningstar categories through June 30, 2020, and 43 percent were in the top quartile, meaning that ESG funds out-performed non-ESG funds. (Past performance is not indicative of future performance.)

Perhaps most compelling, investors — including plan participants — want responsible investing (RI) choices. In the 2020 Nuveen Responsible Investing survey, 59 percent of investor-respondents said they would choose an employer based on the availability of a RI option in their 401(k) plan – and 53 percent percent cited performance as their primary motivation for responsible investing.

There’s an excellent case for sponsors enhancing their plan’s perceived value with a RI option and that, in 2021, any advisor can build their value by helping clients make such options real.

Retirement income: The door is wider than ever 

As more DC plan participants transition into retirement, interest in securing lifetime retirement income has accelerated — as has DC’s evolution into an effective tool for generating income as well as accumulating savings.

Plan participants are clear about the worth they place on retirement income. In a 2020 TIAA survey of more than 1,000 participants, 72 percent cited “programs offering ways to obtain guaranteed income in retirement” as highly valued support from employers, the highest-ranked of any support item.

For advisors who want to sharpen their income-related guidance to sponsor-clients, the good news is that new, highly customizable approaches for generating income in-plan are emerging all the time. For example, sponsors now can tap target date fund-like (TDF) vehicles that embed annuities within a structure of readily tailored asset allocation models. Such vehicles provide sponsors with the benefit of a plan option that can be aligned with specific workforce demographics and efficiently shifted to income generation as appropriate. In some cases, products have been designed to anticipate that a fiduciary advisor will work with their sponsor-client in customizing the models their product employs.

The door for such products opened wider in late 2019 with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which eased the regulation covering the inclusion of annuities inside of 401(k)s and other DC plans. Yet, in our recent TIAA survey, roughly half of plan sponsors conceded they were unfamiliar with the law, including its specific provisions covering secure retirement income. Consider how you can help your sponsor-clients get better up to speed on the changing landscape of guaranteed retirement income, and be sure to point them toward all the new ways emerging to address this urgent participant need.

Fees:  Avoiding unpleasant surprises

Over the past decade, enhanced DC plan fee disclosure levels mandated by the U.S. Department of Labor (DOL) have given many sponsors a far better understanding of their actual administrative costs. Due diligence reviews, fee benchmarking and evaluation of alternatives have frequently reduced plan costs which are often paid directly from participant accounts.

Yet, managing DC administrative fees remains complex for sponsors, with many and varied nuances from recordkeeper to recordkeeper. In fact, without proper apples-to-apples comparisons among various fee options, your sponsor-client might be challenged to distinguish “low fees” from “high fees” or may not even be aware they are paying higher fees. You can help them sort through the details.

Typically, sponsors have been offered either an asset-based or a participant-based pricing structure. But in recent years, per-participant pricing has become more common, introducing new complexity.

With the trend toward participant pricing, many recordkeepers have adopted “a la carte” or “unbundled” fee structures for specific services like fees for transactions such as distributions, or for “out of scope” services such as fund changes, communications and employee meetings. Such costs can be unexpected and can add up quickly.

The upshot  

Working with clients to educate them on these nuances and truly looking at the total administrative costs — including ancillary and participant level fees — can ensure you and the client know the “full” cost of the plan. You should encourage your clients to stay well informed on how their fee structure works, including timing and calculation methods, and evaluate all available options to determine the right method for fairly and equitably paying the administrative fee for their plan population.

Above all, help your clients frame the right questions to ask when things aren’t clear. Remember that simply reviewing fees only tells part of the story; clients should also evaluate the amount and the quality of actual services being provided and consider what other providers with similar fee structures might deliver.

Taking steps with your clients to avoid unpleasant fee “surprises” can be one of the biggest points of value you provide to your clients in 2021.

David Swallow is Managing Director and Head of TIAA Consultant Relations. In his capacity, he is responsible for developing and implementing the strategic vision for supporting consulting firms and building market awareness around TIAA services and capabilities.

Prior to TIAA, he was the Defined Contribution Plan Consulting Client Practice Leader for Aon Investments USA Inc. and was responsible for consulting to Aon’s Not-For-Profit clients on Defined Contribution plan administration, record keeper evaluation, fiduciary governance and fee practices. In addition, he served in various capacities from managing client services teams to leading regulatory and compliance efforts at Ascensus and Buck. (609) 243-6083 David.swallow@tiaa.org