10 Years ‘After,’ Part III – Bracing for the Next Crash

A decade ago this past weekend, Lehman Brothers filed for bankruptcy. Shortly thereafter Merrill Lynch sold itself to Bank of America, and AIG reached out to the Fed for a bailout.  In Part III of this excerpt from the fall issue of NAPA Net the Magazine, seven of the nation’s leading advisors look back at the 2008 financial crisis.

Steve Ulian, managing director at Bank of America Merrill Lynch, sees keeping participants focused on long-term outcomes, not short-term results, as the key to limiting the harm of the next market crash when it happens. “The biggest thing we can do is continue to find ways to reinforce with participants that the market goes up, and the market goes down, and these are long-term investment vehicles for their retirement,” he says.

What else can plan advisors do proactively to limit the impact of the next market crash on participants?

Help Sponsors Understand Their QDIAs’ Volatility Potential

Equities have volatility, and won’t go up forever, says Randy Long, founder and managing principal at SageView Advisory Group. Many participants got hit hard in the 2008 market crash because of their over-weighting to equities, which he traces to the market rising steadily prior to that. “You could say that participants have that same sense of comfort today, because they have seen a nine-year bull market,” he adds.

In the past decade, target-date funds have put many Americans in better shape to withstand volatility, because of these funds’ professional management and investment diversification. “But we are approaching the longest bull run in the history of the U.S. markets,” Jim O’Shaughnessy, managing partner of Northbrook, Illinois-based Sheridan Road, says. “Target-date funds really came into vogue because of the PPA. The majority of people in TDFs now have been put in there since ’08, so these people have not experienced a major market correction in them.”

Some automatically enrolled participants 100% invested in a TDF likely will get a shock when the next major market correction happens. “One of the biggest revelations after ’08 was about the ‘set it and forget it’ investment environment we were in at the time,” Bill Chetney, founder of Carlsbad, California-based GRP Advisor Alliance says. “The thing is, the disparity of returns in the 2010 TDFs was a 20-point spread. The Securities and Exchange Commission got very much up in arms about that, and target date funds were in the crosshairs. What happens if there’s another major break in the market in 2020, and many target date funds still have that kind of exposure?”

Many sponsors still don’t understand the potential disparity of returns for their plans’ default investments, Chetney believes. They’d be smart to learn more about that, he says, and to determine the disparity of QDIA returns that they feel comfortable accepting. “If you ask the average committee member, they’d probably say that their plan’s QDIA is risk-averse,” he says. “But if you look at what they actually use as the QDIA, they often aren’t.”

Sponsors may get a surprise when they learn more about their QDIAs’ potential for volatility. “If you look at how target date funds are graded on the scoring systems, you see that managers are rewarded for taking risk and participating in the bull market,” Chetney says. “So people are being told, at the end of the bull market, ‘Jump in.’”

Advisors can play a big part in helping sponsors better understand their QDIAs’ risks, Chetney says. “I see some of the better advisors going beyond just looking at the scoring systems, and modeling for sponsors their target date funds’ potential returns,” he says. “They will model, ‘If your default investment goes up 20%, this is what the range of outcomes could be, and if it goes down 20%, this is what the range of outcomes could be.’ Some of the higher-flying TDFs do not look as good when you look at them that way.”

Offer Participant-Level Fiduciary Advice

Plan advisors can add a lot of value by figuring out a scalable way to give participants individualized advice in areas including investments and deferral rates, Chetney says. “That is the next frontier of what we need to do,” he says. “We’ve automated everything: auto enrollment, auto increases, auto investment. We ‘auto’ be talking to them.”

But current fee levels don’t usually support in-depth, one-on-one advice from a plan advisor. “We’ve priced that out of the market,” Chetney says. “Back when I started as a plan advisor, we used to do 20-minute, one-on-one meetings with every single employee of every single client. The economics are gone for that now.” Advisory firms that lack the size to do it can align with an outsourcer that offers a call center staffed by CFPs, he says.

Some advisory firms have built the capabilities in-house. CAPTRUST gives participant-level 3(21) fiduciary advice, and chief executive officer and co-founder of CAPTRUST Financial Advisors J. Fielding Miller thinks of it as a key competitive differentiator. “But it is a hard and expensive thing to do,” he says. “It took us years to get it to scale. We have invested more in that part of our business in the past three years than any other — and it’s the fastest-growing part of our business now. The margins aren’t as good, but they’re getting better. And the impact is incalculable. It is the only thing that moves the needle: giving participants actionable advice, and then making sure that they carry through with it.”

Instead of having CAPTRUST advisors give participants recommendations, the firm has hired what it calls “retirement counselors” to do this work full time, traveling to client sites nationwide. The 28 retirement counselors include CFPs, former education specialists at providers, and ex-school teachers. CAPTRUST built out tablet technology so that the retirement counselors have a structured way to provide customized recommendations for participants. The advisory firm also hired staff for an “advice desk” so that participants can call in and get recommendations.

Pensionmark introduced its participant-level fiduciary advice offering earlier this year, after years of thought, legwork, and getting big enough to make it viable. “Where we can really move the needle as advisors is in offering much more robust financial planning help for participants,” Troy Hammond, founder, president, and CEO of Pensionmark Financial Group says. “But the barrier to entry is tough, if you want to do it right: You’ve got to hire the right people, build some technology, and buy some technology.”

Pensionmark has been very strict about providing participant-level fiduciary advice only if it’s an employer-paid benefit and offered to all employees (not just senior executives), Hammond says. “In terms of employees who are going to really dig into a program like this, you are probably talking about 10% to 30% of an employee population,” he says. “We feel that if you’re providing a benefit paid by plan assets that only benefits 10% to 30% of participants, it generally doesn’t pass the ‘smell test’ for us.”

The rest of this four-part series can be found here:

Judy Ward is a freelance writer specializing in retirement plans.

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