In this cover story from the latest issue of NAPA Net the Magazine, eight of the nation’s top young retirement plan advisors talk about how they’re helping sponsors during an unprecedented time.
“Anxious” is how Michael Curry described plan sponsors’ mood in the early spring, as the Coronavirus crisis, market volatility, and economic decline converged. “Anxiety seems to be an ever-present emotion across plan sponsors now,” says Curry, a senior retirement plan consultant at The Hocking Group at UBS Financial Services in Los Angeles. “They’re dealing with the uncertainty of the months ahead, and how things seemingly go a different way every day.”
But Curry, working in the first state to issue a stay-at-home order, saw an opportunity for plan advisors amid all the uncertainty. “I’ve had more conversations with plan sponsors and participants in the past month than in the past year, and there’s a very human component to a lot of the conversations I’m having,” he said in early April. “I think where we can provide the most value right now is just optimism, and talking about the resiliency of our society, and the markets. There’s a lot of negativity out there. But remaining calm and confident in a better future is really important right now.”
“The mood of employers has been tough, because there’s a lot going on for them, with their whole business,” says Julie Braun, corporate retirement director at The Dubie Group at Morgan Stanley in Colchester, Vermont. “What’s happening is unprecedented, and how that is happening is different for all of them. As advisors, we just need to be there for them, and to help them.”
Two Pressing Issues
As employers struggled to keep their business going, Erin Hall says, many looked to cut expenses where they could—including the 401(k) match. “The match is typically the biggest cost of a plan to the employer, and there has been a lot of discussion about suspending the match,” says Hall, managing director at Strategic Retirement Partners in Los Angeles. “As a retirement plan advisor, you hate to see a plan reduce or eliminate its match. But we try to respect that they know their business. If a sponsor calls me right now and says, ‘We need to suspend the match,’ I’m not going to question that.”
Match suspensions didn’t get much employee blowback when employers announced them, Hall saw. “Employees get it: They recognize that this is a ‘necessary evil.’ Honestly, they’re happy to still have a job, and a paycheck,” she says. “The communication has been honest. The employers are saying, ‘We’ve lost our revenue, and we’re trying to do everything we can to maintain our operations. Right now, as much as we don’t want to, we have to suspend the match.’ And they’re expressing confidence to employees that this is an important benefit, and they still value giving it to their employees. It’s just about honesty and empathy.”
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Braun, who also has gotten requests from employer clients to help them move forward on their match suspension, says she doesn’t see this as the time to try to talk them out of it. “It comes back to really listening to them, because they all have different needs and different budgets,” she says. “I think we have to be impartial, and help them through it. If it was a more normal situation, maybe I’d try to talk it through with them, and talk about whether they have other options besides suspending the match.”
Mark Beaton works with plan sponsors of safe-harbor plans, and a few have reluctantly decided to suspend their match. “Because of the safe harbor’s minimum match requirements, they have to suspend the match, not reduce it,” says Beaton, vice president, retirement plan consultant at Bukaty Companies Financial Services in Denver. “We’re working with TPAs on making plan amendments, and helping plan sponsors distribute the required 30-day notice to participants. We’re also performing testing due diligence, to make sure that these plans are not top-heavy now.”
The other pressing thing many sponsors need their plan advisor’s help on now: figuring out the CARES Act, especially the optional loan and distribution provisions. “I was actually surprised by the number of clients interested in really evaluating each provision,” says Jessica Espinoza, senior vice president of retirement plan services at NFP in Bethesda, Maryland. “I expected the vast majority to just opt in, but it’s interesting to have a lot of what we’ve taught plan sponsors come into play on this.”
Espinoza’s years of helping sponsors focus on retirement readiness has apparently made an impression, because many clients are aware that increasing participants’ ability to take money out of their account could create a longer-term problem for their retirement outlook. So she’s talking through the pros and cons with clients. “What I’m seeing is 75% are deciding to opt into the provisions,” she says. “For some clients that are opting out, it might be that the industry or business they’re in is well-insulated from furloughs or layoffs, so they don’t think they need to offer that additional access.”
Kelli Davis also has been helping sponsor clients weigh whether to implement the loan and withdrawal provisions. “As much as we would like to say that everyone has three to six months of income in emergency savings, we know that’s not the reality. You’re going to have employees who don’t have any other option than their retirement account,” says Davis, vice president of retirement plan consulting at CSI Advisory Services in Indianapolis. “On the other hand, it’s really in the next two or three years where the gains are going to be made in the market: If people take money out of their account now, they’ve lost out on the opportunity to make those gains back. And if sponsors make it easier to take money out, there may be participants who take their money out just because that’s an option, not because they really need it.”
Davis and her CSI colleagues had a lot of conversations with participants in the early spring about plan loans and withdrawals. “I always tell people, ‘This really should be a last resort,’” she says. “They need to understand the ramifications, not just today, but down the road. It’s so disheartening to hear people in their 20s say, ‘It’s only $5,000, it won’t make any difference.’ But when you look 20 or 30 years down the road, it willmake a difference. Down the road, they may be looking at, ‘I wanted to retire at 65, and now it’s going to be 68.’”
Five Ways To Help, Post-Crisis
When the immediate crisis subsides, the Aces talked about how they’ll help sponsors and participants:
1. Help Sponsors Gauge the Impact, and Respond
“Sponsors are being overloaded right now. But in our practice we’ve had some discussion about, ‘When the time is appropriate, what can we do to help participants get back on track?’” says Jordan Sibler, vice president/wealth management at Tower Circle Partners of Janney Montgomery Scott LLC in Franklin, Tennessee. “If you were about to retire, and your portfolio is down 30%, that may change your decision. But for most people who are further away from retirement, this is something they can recover from.” 
Amid the market and economic downturns, Braun already started looking ahead to how to help participants recover. “It unfortunately will have a negative impact on retirement savings,” she says of the downturns. “But I think there’s going to be a great opportunity for advisors to help participants get back on track. In our practice, we’re going to sit down one by one, with each client, and look at the recordkeeping data, to get a good sense of what happened. How many people took money out of their account, for example? Then we’re going to come up with a game plan for each plan, to get them back on track.”
The impact of the crisis on retirement readiness could motivate some sponsors to make plan-design improvements, Braun says. “I think there could be some positive changes that come out of this time, once the dust settles,” she says. “We may see some employers start doing reenrollment, or add auto enrollment or auto escalation, if they don’t have that already.”
2. Build the Business Case for Match Reinstatement
Sibler expects to see employer interest in reinstating the match for 2021. “Most employers are not looking at this whole situation as a way to save pennies,” he says. “Where employers are suspending their match, they want to get back to where it was, when they can.”
That may involve making a business case for match reinstatement with senior management. “I don’t think the business case is any different than it was before the pandemic,” Sibler says. “There is always the struggle of, ’What do we need to do to recruit and retain good employees?’ Once we get businesses back, there is going to be a lot of hiring, and I think there will be a lot of competition for skilled talent especially. If someone has a choice between two (otherwise-equal) employers, and one has a great match and one doesn’t, it’s an easy choice.”
Shaun Eskamani points to the business case that can be made from a behavioral-finance perspective. “We’ve seen how the amount of money deferred by participants often coincides with the employer’s match,” says Eskamani, principal and financial advisor at CAPTRUST in Raleigh, North Carolina. “People want to know, ‘How much will my employer give me in free money to put toward my retirement?’ When you remove the employer contribution, many employees immediately think, ‘My employer removed the match, therefore I need to stop my participation or reduce my deferral amount.’ So there’s a dual negative impact that often takes place.” That impact could delay retirement for some people.
When NFP talks about justifying the match expense, Espinoza says, it includes the long-range perspective on retirement readiness. “We talk about the long-term cost if people don’t accumulate enough, and don’t retire on time. So we’re asking, ‘If employees prolong retirement, how does that impact the employer’s costs in areas like health care?” she says. NFP uses modeling tools to project the long-term costs for employers if employees delay retirement. “We’re telling employers, ‘Don’t look at the match cost in a vacuum,’” she says.
3. Help Sponsors Reexamine Their Target Date Funds
When they see the first-quarter performance, some sponsors and participants likely will be surprised by the steep decline in their plan’s target date funds. “For those sponsors who have not focused on the suitability of their asset-allocation solution for their participants, they’ll be forced to do it now,” Espinoza says. “There is a ‘silver lining’ to this situation if it results in higher attention to that.”
The Dubie Group at Morgan Stanley regularly does a deep dive of the target date funds in its clients’ plans, looking at their asset allocation, glide path, and risk parameters, Braun says. “You need to do that not just when a sponsor picks the funds, but continue to do it,” she says. “At least once a year, we come back and ask, ‘Does the target date fund family you chose still perform well? And is it still right for your participants?’”
Target date fund reviews can help limit damage in the next market downturn. Beaton has been performing target date fund analysis with his clients, to see if they had the right target date funds for their plan demographics. “That has actually paid off pretty well in the downturn,” he says. One client switched from an all-index TDF to a TDF family that blends use of active and passive management, for example. “That has saved them on the downside of the 2020 fund almost six percentage points,” he adds.
Eskamani sees a tremendous opportunity for advisors to help sponsors reexamine their target date funds after the crisis subsides. “We can help them really understand their glide path and allocations, then marry that with their actual participant behaviors, and with the committee’s philosophical views,” he says. The philosophical questions he has for committees include their beliefs about using active versus passive management, their prioritization of fees and expenses, their sense of whether a “to” versus a “through” glide path makes more sense for their participants, and whether they prefer a target date fund family with “plain vanilla” allocations, or one that diversifies more broadly into areas like commodities, real estate, and emerging markets. CAPTRUST looks at participant data including the average age of participants in each vintage of a plan’s target date funds, how far employees are from normal retirement age, and whether they typically keep their money in the plan or roll it out when they leave the employer. “Distribution behaviors are important,” he adds.
4. Look Closer at the Core Menu, Beyond Equities
There’s been a lot of focus on the implications of the downturn in equities, but it’s also an important time to reassess a plan’s capital preservation funds, Eskamani says. “The investments you think would be the least complex are, in some cases, the most complex. So we want to get ahead of what happened in 2008, with some capital preservation funds having negative yields,” he says. “In 2008 and 2009, we saw their market-to-book ratios decline in many cases. When participants went to move their money, there were consequences: They anticipated getting $1 back for every $1 they invested, plus interest, but in some cases they didn’t.”
The equities downturn also could make the argument for having a broader and more diversified menu of fixed-income options. “That can mean having not just an intermediate-term bond fund, but also a high-yield fund and a TIPS fund,” Eskamani says. The move to add more core fixed-income options especially has happened with sponsor clients that opt to utilize CAPTRUST’s fiduciary investment advice service for participants. “We’ll often keep the investment menus more basic when a client hasn’t elected to have us provide investment advice at the participant level,” he says. “But when we do provide that advice, we can discuss in detail with a participant, ‘Your plan has a broad array of fixed-income options, and let’s talk about what diversified combination makes the most sense for you.’ We don’t want people making the mistake of seeing the name ‘high yield’ and thinking that it’s always better than low yield.”
5. Make the Case for Financial Wellness
This crisis will strain many Americans’ finances, and Sibler sees a lot of potential for helping them with financial wellness education on basics like budgeting and building emergency savings. “A crisis like this wakes people up,” he says. “We have to get folks to the point where, when the unexpected happens, people don’t have to figure out how to pay for their groceries.”
Asked about making the case to employers on the need for a financial wellness program, Hall says that Americans had lots of financial stress even before the events of early spring. “If people then dipped into their savings or went into credit card debt during this time, there is going to be a greater need for financial wellness education,” she says. “Hopefully employers will understand that. At least now, everyone has a shared reference point on the need.”
Advisors will need to assess so many different areas with plan sponsors, once the U.S. and global economies start to experience a period of more normalcy, Eskamani says. “From a participant standpoint, it’s going to be about getting their financial house in order, and that starts with budgeting and debt management,” he says. “People are going to want to get their personal financial balance sheet in order, before they think about their retirement savings. So we’ll need to start with the basics, then work our way toward more complex financial wellness topics.”
Judy Ward is a freelancer who specializes in writing about the retirement industry. This article originally appeared in the Summer issue of NAPA Net the Magazine. To view the digital version of this article, click here.
