Head of Retirement—U.S. Intermediaries
T. Rowe Price
2018 was characterized by two major themes: a persistent cost sensitivity for DC plans and an increased appetite for both investment solutions and retirement insights that address participants’ desire for better retirement outcomes.
Fiduciary awareness led to heightened cost sensitivity in 2018. Even though total plan costs have been steadily declining for the past 15 years, the perception among plan sponsors does not reflect that. Advisors had to communicate the value of each component in a plan and battle the misperception that “cost” and “value” are the same thing. We’ve seen many advisors address this concern by converting target date funds to lower cost CIT vehicles.
In addition, volatile capital markets led to additional investment scrutiny, and advisors dug deep into investment philosophy. Advisors needed to focus communications on what risk management controls have been in place to protect participants’ future retirement income.
Finally, we saw participants’ concerns about holistic financial planning and retirement income emerge as major topics in 2018. This occurs most frequently in financial wellness discussions related to generating income in retirement. It is both an evolving and a personal topic so there are a variety of approaches advisors can take as they develop their offering and engagement models.
Managing Director, Retirement Benefits Advisory and Compliance Growth Leader for North America
Willis Towers Watson
There was and continues to be increased focus by government regulators on assessing retirement plan oversight and operational activities. A key area of focus during 2018 has been on the processes supporting, and outcomes of, searching for missing plan participants and starting benefit payments on time. This is in addition to the continued litigious activity surrounding fees charged to plan participants. Plan sponsors continue to look for ways to mitigate their risks of litigation and regulator fines, paying particular attention to ensuring proper fiduciary oversight of plan management activities. We’ve also seen plan sponsors outsource fiduciary activities that are not aligned with their core capabilities, for example outsource some or all of the investment and administrative fiduciary decisions, with the goal of reducing their overall risk as a plan sponsor.
This year also saw increased interest in plan funding activity given tax reform. Pension contributions that were made for 2017 prior to the deadline in 2018 helped plan sponsors reduce overall tax obligations and increase plan funded status.
John Faustino, AIFA, PPC
Chief Product and Strategy Officer
In 2018 we witnessed a good deal of drama associated with the now-vacated Department of Labor (DOL) fiduciary rule. It also included healthy debates on SEC and state fiduciary proposals.
Our fiduciary offerings (training/designations, data and software) saw great demand in 2016 and 2017, presumably driven by anticipation of the DOL rule taking effect. Demand caused by regulatory requirements is expected. Surprising to some, strong demand for our fiduciary offerings continued in the face of the DOL rule being vacated, sending a powerful message on where we’re going. Fiduciary isn’t a rule, it’s a principles-based market movement. Regardless of who wins the legal battles, the DOL, SEC and state fights have created more fiduciary awareness among clients, both institutional and individual, than ever.
Practitioners who’ve embraced and evangelized fiduciary practices are winning assets from others. For many firms and plan consultants, fiduciary has changed from a "nice-to-have" (or in some instances … a "not-nice-to-have") to a market imperative. As those who’ve previously focused on "broker of record" business transition, or abandoned, plans, we saw fiduciary plan consultants take advantage of the opportunity in 2018. We see the bias toward fiduciary persisting and strengthening, suggesting fiduciary plan consultants will continue to thrive.
Chief Operating Officer
Ascensus Retirement Division
From a practice management perspective, advisors who have historically worked in a commission-based model are moving to fee-based. Many are looking to our service team for guidance on how to make this transition efficient for themselves and their clients.
Business owners face many challenges just running their day-to-day businesses. At the same time, they want to help their employees prepare for their financial futures. Many are looking to their providers and TPAs for additional administrative services, perhaps even to take on 3(16) fiduciary responsibility. They’re also working hard to get employees started in their 401(k) plan. A larger population of employers, across plans of all sizes, are leveraging automatic enrollment and our data suggest that these employees seldom opt out once they’re auto-enrolled.
We’ve also seen a notable shift in plan sponsor mindset. Employers want to become more involved in improving employees’ holistic financial health. That’s why we’re seeing financial wellness programs take hold—employers recognize the value of reducing employees’ financial stress to foster a happier, more productive workforce.
Finally, the availability of a Roth option is becoming more widespread among smaller plans, although adoption seems to be lagging: Just a small percentage of employees actually make Roth contributions.
There were two key developments that affected retirement plan consultants' work in 2018:
- Preparing clients and their portfolios for market volatility, and
- Navigating markets once volatility hit in earnest starting in October.
Consultants were preparing clients for market turbulence in both equities and fixed income after five-plus years of muted volatility and material portfolio appreciation. The preparation included the basics like rebalancing and adding additional diversifiers, such as real assets and private debt. Most important, consultants conducted portfolio stress testing with clients that prepared them for a wide array of environments, including recession, interest rate spikes and illiquidity. The stress testing of portfolios prepared clients for the fourth-quarter downturn and, in many cases, prompted clients to adjust portfolios to best meet their objectives. For example, corporate pension clients have refined their fixed income/liability hedging portfolios into separate long credit and Treasury strips portfolios, which allows for better risk management and repositioning as interest rates and credit spreads fluctuate. Now that we are experiencing market volatility, consultants are beginning to work with clients on how to potentially redeploy capital where opportunities for return or additional diversification are presenting themselves. Areas capital may be reallocated to are emerging-market debt and volatility strategies.
Institutional Retirement Income Council
One significant development was the 5th U.S. Circuit Court of Appeals ruling vacating the Labor Department’s fiduciary rule. Nevertheless, the now defunct rule has had a significant impact on the defined contribution system and the rollover and financial-planning marketplace. In essence, plan sponsors, retirement service providers, financial service firms and intermediaries are now forced by market pressures (not regulations) to review their practices to ensure they act in a manner that is in the best interest of their participant customers. As the best-interest requirement is pursued by both market pressures and now by the SEC in its proposed rule, our industry will realize a significant opportunity to promote institutional retirement income strategies from DC plans as the best alternative for many Americans.
Another significant development was the coalescing of the retirement industry to reject the Rothification efforts that emerged as a way to “pay for” the projected deficit resulting from the tax reform law. The ultimate preservation of tax-deferred contributions showed Washington and other constituents that when necessary, the industry could rally together to maintain the current retirement system and the security it provides. Interestingly, the DC industry began educating plan participants on the benefits of Roth savings in the current tax environment, and we expect those efforts to intensify in the next few years given the potential benefits of saving via Roth now instead of using pretax savings.
Head of Vanguard Strategic Retirement Consulting
This year, legal and regulatory actions continued to shape the playing field. For one, the 5th U.S. Circuit Court of Appeals decision to vacate the DOL’s fiduciary rule was a noteworthy development. Consultants who had devoted significant resources toward compliance with this rule were left with the task of deciding which, if any, of those processes would remain as part of their service delivery model to retirement plans and their participants. That said, the industry was already moving toward improved transparency, and we expect that positive momentum to continue.
The Bipartisan Budget Act of 2018 contained surprise provisions related to hardship withdrawal rules. While these provisions were not effective until January 1, plan sponsors and service providers spent much of 2018 preparing for their implementation and waiting for IRS guidance, which was not issued until November.
Fee litigation remained a hot topic for 2018, with the oversight of plan expenses dominating the headlines. Recent cases focused on the need for committee members to be actively engaged and to have at least some level of expertise in fulfilling their fiduciary duties. Looking ahead, consultants will likely be expected either to directly provide this expertise or facilitate its delivery to plan fiduciaries.