Thinking strategically: The role of advisers and consultants in DC plans

Consultants and advisers want to take a larger role in managing the details of DC plans, leaving plan sponsors more time to think strategically about the plan and especially how to improve participation and saving levels.


Advisers and consultants play a crucial role in providing investment advice to defined contribution plan sponsors as well as a wider perspective on the plan itself. But they do not always see the nature and degree of the challenges facing DC plans the same way their clients do.

One of the most dramatic findings of Institutional Investor‘s recent survey of consultants and advisers, in partnership with Prudential, was the level of concern they expressed about many aspects of DC plan performance. Plan sponsors often need assistance and advice helping participants achieve a successful retirement, 71 percent of advisers and consultants agreed, while 68 percent said their plan sponsor clients need help making sure participants choose the right investments and understand how much they need to save in order to achieve financial security in retirement. By contrast, 55 percent of plan sponsors say they do an effective job helping participants retire successfully, 53 percent that they are effective at helping participants choose the right investments and 59 percent that they are effective at helping participants understand what they need for financial security.

We conducted a series of one-on-one interviews with advisers and consultants to better understand their perspective, what changes they feel plan sponsors need to make to meet the perceived challenges and how they would like to see their relationship with plan sponsors evolve. Perhaps the most serious problem for all but very large employers, consultants said, are resource constraints.

“As DC plans rise in prominence, the reality is that there are a lot of decisions to be made and a lot of components that need to be managed, and committees and staff only have so much in the way of resources to do it,” says Mark Teborek, senior consulting analyst at Russell Investments. That leads to more reliance on outside providers—but not always in a systematic or strategic way. “Small plans most likely have someone overseeing them who has other responsibilities as well, and so they rely on their recordkeeper or third-party administrators to design a plan with the right features,” says Ryan Gardner, managing partner and senior consultant at Fiduciary Investment Advisors.

Often, these outside providers bring valuable resources and expertise to the plan. Donna Wimbec, senior manager of global benefits compliance at Brown-Forman Corp., which sponsors corporate and union plans with a collective $448 million in assets, says she has received a great deal of support from recordkeeper Wells Fargo in tailoring communications to the distiller’s employee resource groups (ERGs), which are composed of subsets such as women and younger employees. Wimbec attributes the company’s success at boosting plan enrollment in part to communication and education through the ERGs.

However, some plan improvements that larger companies have the staff and resources to make on their own are more difficult for smaller and mid-sized employers to implement. Switching from retail mutual funds to collective trusts and multi-manager separate accounts as investment options saves money and gives the plan access to a broader range of talent, but it requires more research and closer ongoing attention—which mid-sized and smaller plans are less able to supply, says Lori Lucas, defined contribution practice leader at Callan Associates. The result is that they often rely on their recordkeeper to provide all or most of the funds in their investment menu.

Looking to take a more strategic view of their DC plans, employers are becoming more open to giving consultants a bigger role, especially in investment decisions. At Pacific Life Insurance Co., a financial services company with a $1 billion plan and 2,300 active participants, the consultant, Mercer, sometimes plays a crucial role in decisions affecting the investment menu. The investment committee meets once a quarter, says Patrick Paynter, group retirement analyst, and receives recommendations from Mercer whether some funds should be placed on a watch list or removed and replaced. When the committee finds it difficult to make a decision, Mercer’s voice looms larger. When it split on naming a replacement for a bond fund recently, the committee “asked for guidance from Mercer,” Paynter recalls. “Ultimately, the committee made the decision, but it was the fund Mercer recommended that it went with.”

But consultants want to play a larger role in every aspect of DC plan design and management—not just investments. Says Paul Denu, defined contribution practice leader at USI Consulting Group, “When you hire us, it should be to help you design a better plan, make sure expenses are not out of control and make sure asset quality is the best possible.” Pavilion Advisory Group offers clients “investment consulting, fee analysis, benchmarking, operational reviews, vendor searches and establishing a governance structure for the plan,” says Jennifer Flodin, defined contribution practice leader—everything that their recordkeeper and ERISA attorney do not provide.

Despite having greater internal resources, even some of the largest companies are eyeing consultant relationships that are similar to those consultants have, or had, with traditional defined-benefit pension plans. “My vision is that they offer us input on the structure of the plan, along with helping the investment committee on manager selection,” says Greg Tahvonen, vice president of total rewards and global human resources at Delta Air Lines, which has $15 billion in 401(k) assets.

In what direction do advisers and consultants want to see plan sponsors evolve? Our survey and interviews revealed a sharp preference for plan sponsors to direct participants more strongly to save more and make more forward-looking investment decisions and to anticipate the needs of an aging workforce. In interviews, most consultants also voiced support for more aggressive automatic enrollment, for automatic rebalancing, for reenrollment as a way to boost participation and shift participants into more age-appropriate investment choices, for strict limits on loans and company stock and for the plan sponsor to take employees’ tax concerns into account in selecting plan features—for example, including a Roth 401(k) option. Consultants are enthusiastic about the advantages of target date funds, at least nine out of ten saying TDFs help employees overcome risk aversion (90 percent), provide better diversification than employees could do on their own (91 percent) and simplify investment decision-making for the less sophisticated (93 percent).

“Plan sponsors have to limit employees’ ability to derail themselves,” says Flodin.

While consultants seldom involve themselves directly in participant communication and education, they increasingly see these as crucial aspects of the plan and are more apt to offer advice to plan sponsors in these areas as well. “We talk with [plan sponsors] a lot about the providers,” Flodin says. “Why pay a recordkeeper for communication and education when it doesn’t move the needle? Why not shop it out or hire another firm that talks about overall financial wellness instead of the stale, large-cap-versus-small-cap discussion that doesn’t engage participants?”

Certainly, advisers and consultants benefit as well when plan sponsors turn to them for more of the expertise needed to run their DC plans—on education and communication, investments and other plan features. But repeatedly in interviews they stressed that employers must spend less time grappling with the details of the plan and more time thinking strategically about its ability to meet the needs of employer and employees. As DC plans grow and assume an ever larger role in retirement planning, smaller and mid-sized employers, especially, will need to have resources within reach to help them make well-judged decisions on how to improve their plans—often, with the help of advisers and consultants.


This study was developed by Institutional Investor, in partnership with Prudential, to identify the investment risks and behavioral challenges that need to be addressed throughout the retirement planning process and how plan sponsors, advisers and consultants are trying to overcome them.

To support this research, a survey was distributed to Institutional Investor’s audience of plan sponsors as well as advisers and consultants between January and February 2016. We received 511 completed survey responses from the plan sponsor audience and 295 completed survey responses from advisers and consultants.

Auto Enrollment: An automatic contribution arrangement that can be used as a feature in a retirement plan to allow employers to enroll employees in the company’s plan automatically upon meeting eligibility requirements.

Auto Escalation: A plan design option that allows a plan sponsor to increase participant deferrals annually by a set increment.

RISKS: Investing involves risk. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost, and it is possible to lose money. Past performance does not guarantee future results. Asset allocation and diversification do not assure a profit or protect against loss in declining markets.

The target date is the approximate date when investors plan to retire and may begin withdrawing their money. The asset allocation of the target date funds will become more conservative as the target date approaches by lessening the equity exposure and increasing the exposure in fixed income type investments. The principal value of an investment in a target date fund is not guaranteed at any time, including the target date. There is no guarantee that the fund will provide adequate retirement income. A target date fund should not be selected based solely on age or retirement date. Participants should carefully consider the investment objectives, risks, charges, and expenses of any fund before investing. Funds are not guaranteed investments, and the stated asset allocation may be subject to change. It is possible to lose money by investing in securities, including losses near and following retirement.

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