2012 Perspectives Study: Retirement Plan Consultants Highlights

Transcription

1 2012 Perspectives Study: Retirement Plan Consultants Highlights

2 Oculus Partners is a strategic consulting firm bringing specialty expertise to leading financial firms and service providers with a focus on retirement and wealth management. Formed in 2008, the firm has grown to serve over 25 corporate clients including banks and broker/dealers, asset managers, insurers, clearing agents and custodians, and technology companies. Simply put, we help our clients stand out from the crowd, accelerate growth, maximize relationships, and enhance their business health. And we accomplish this by using three unique qualities our firm offers clear vision, unique insight, and practical innovation. For further information on purchasing this report or for reprints of these highlights please contact: Cynthia Hayes, CFA CEBS President, Oculus Partners, LLC chayes@oculuspartners.com (404) Or visit us at

3 2012 Perspectives Study: Retirement Plan Consultants O V E R V I E W This highlights report has been specially prepared for the SunGard OMNI Summit. These highlights and our detailed study cover five major areas of focus: Consultant Practice Overview Consultants Defined Consultant Services Client Acquisition Business Differentiators The Provider Selection Process Reasons for Search Provider Inclusion Criteria Desired Services and Capabilities Sales Best Practices Other Types of Searches Plan Sponsor Attitudes and Plan Design Trends Plan Sponsor Objectives Retirement Income Philosophies Automatic Programs Roll Ins, Roll Outs, and Advice Providers Who Stand Out Winning Providers by Market Segment Leaders by Service Category Provider Comparisons A Word on Fees A Word on Customization A Word on Differentiators Plan Investments Investment Types Menu Construction Investment Evaluation and Change Investment Manager Usage Investment Fees and Costs Additionally, in our detailed findings for each area of focus, we developed specific observations and actions providers might consider as a result of these findings. We also provided overall conclusions regarding the implications of these findings for providers in terms of: Evolving Dynamics Competition and Commoditization The Greater Good Moving Ahead In this highlights report, we have provided the detailed findings related to the Consultant Practice Overview so that SunGard s attendees may see how their intermediaries are similar to, or different from the Consultants who participated in this study. We ve also provided summary highlights of the remaining four areas of focus. In addition, we ve provided a summary of our over-arching conclusions. Our complete, detailed findings are available for purchase by contacting us at Oculus Partners, LLC. All rights reserved.

4 B A C KG R O U N D Oculus Partners objective in conducting this study was to develop rich insight into important issues that drive business growth for service providers and asset managers in the retirement plan market, focusing on plans greater than $100 million in assets. As part of our consulting work, we felt that the market was missing an in-depth, specialized analysis focused on consultants who serve primarily large market retirement plans full time on a fee-forservice basis. Our approach was to learn how these consultants manage and operate their business, how they think, what they feel, and what advice they can offer to help recordkeeping and investment providers better position themselves for growth. To this purpose, we interviewed prominent consultants focused on this market to determine their perspectives on a number of critical areas of interest including: Overview of consultant business model and practices Current issues driving plan sponsor searches for a new provider The most important criteria for consultants recommendation of a provider and an investment solution Winning and losing practices of providers during the selection process Consultant perceptions of providers strengths and weaknesses Service demands and service preferences Plan success goals and cost considerations to achieve those goals Current trends in plan design, reconfiguration of plan features, restructuring of plan investment options, QDIA usage, and plan cost management mandates For our study, participating consultants were selected based on their search activity in the large plan market (as defined as plans with greater than $100 million in plan assets) in order to gain insights into this unique and highly attractive market segment. We also selected our final consultant group to include representation from both regional/independent consulting firms as well as traditional national benefits consulting firms. We found these consultants to be candid in their responses and willing to clearly express their views on the current and possible future conditions facing the retirement marketplace and the providers that serve it Oculus Partners, LLC. All rights reserved.

5 2012 Perspectives Study: Retirement Plan Consultants M E T H O D O L O G Y To perform this analysis, Oculus utilized our proprietary list of retirement consultants as well as consultant names provided by large market asset managers and recordkeepers. Our final study included 20 consultants from 18 firms. These consultants, as a group, were personally responsible for over 200 searches in Our methodology for the consultant interaction was a 60 to 90 minute one-on-one telephone conversation utilizing a structured interview document. Interviewers were all highly experienced in the large market retirement plan marketplace in both asset management and plan recordkeeping services. These interviews occurred between late October, 2012 through early January, The majority of the questions were open-ended with unaided responses. During the telephone interviews, consultants were encouraged to provide comments, expand on key points, and add additional areas of interest and perspectives. This process resulted in significantly enriched and nuanced information. In 2010, Oculus Partners, in partnership with DST Retirement Solutions, conducted a similar study. Where possible, we have also included trending information from that study for comparison purposes. Our 2012 and 2010 consultant participants had an overlap of 6 individual consultants participating in both studies. PA R T I C I PAT I N G F I R M S REGIONAL / INDEPENDENT CONSULTING FIRMS TRADITIONAL BENEFITS CONSULTING FIRMS 401k Advisors AON/Hewitt Cammack LaRhrette Ennis, Knupp & Associates, an AON Company Capital Strategies Callan Associates Inc. CapTrust Mercer Consulting Defined Contribution Advisors, Inc. Towers Watson Glading Group HS2 Solutions Morgan Stanley Smith Barney PEI Plan Sponsor Advisors Slocum USI White Oak Advisors 2013 Oculus Partners, LLC. All rights reserved. 5

6 C O N S U LTA N T P R A C T I C E OV E R V I E W D E TA I L E D F I N D I N G S CONSULTANTS DEFINED We have observed that in the retirement industry there is no clear or universal definition of a retirement consultant versus a retirement advisor. For the purposes of this study a retirement consultant is defined as a person and firm focused full time on working with retirement plans through an on-going relationship or in a project role on a fee-for-service basis. The retirement consultants in this study average 18 years of experience in this type of work. The consultants in our study each performed recordkeeper searches in 2012 for corporate 401(k) plans with greater than $100 million in plan assets. In addition, many of these same consultants performed searches for plans below this threshold. On average, each consultant conducted 10 recordkeeping searches in We have grouped the 18 firms represented into two primary categories based on the firm s origins and business (details of the firms included in each grouping can be found on page 5 of this report): Independent consulting firms Traditional benefits consulting firms We have provided a view, by consultant, of the specific recordkeeping searches conducted in 2012 by size of plan and grouped by type of consulting firm as outlined in Figure 1 below: FIGURE 1: SEARCH SIZE BY CONSULTANT AND TYPE OF CONSULTING FIRM Independent Consulting Firms Traditional Benefits Consulting Firms PLAN SIZE Oculus Partners, LLC. All rights reserved.

7 2012 Perspectives Study: Retirement Plan Consultants CONSULTANT SERVICES All consultants in the study performed services in two ways: through on-going services, and through periodic engagements related to projects. Types of on-going services are outlined in Figure 2 below which represents the percent of consultants who responded that they performed that specific type of service. FIGURE 2: ON-GOING SERVICES BY TYPE CONSULTANT MENTIONS With only one exception, consultants responded that they spend the vast majority of their time on performing on-going services for their clients rather than in searches and other project work. In terms of project services, all consultants in the study perform recordkeeping searches for 401(k) plans, while some also perform searches for other plan types including 403(b), 457, NQDC, and DB. In addition, while not all the consultants offered investment menu selection services, the majority did provide this assistance. Other project services performed included: Projects Compliance Reviews Plan Design Changes Fee Benchmarking Non-Recordkeeping Searches Investment Management Services Investment Advice Services Participant Communication Services Fiduciary Services Specifically relating to recordkeeping search projects, the group as a whole was responsible for over 200 searches in 2012, for plans of all sizes as outlined in Figure 3. We have also indicated for each size group what portion of the searches resulted in a recordkeeper change versus those that resulted in remaining with the existing recordkeeper Oculus Partners, LLC. All rights reserved. 7

8 FIGURE 3: RECORDKEEPING SEARCH ACTIVITY AND RESULTS BY PLAN SIZE On average, 56% of the searches resulted in no change in recordkeeper. CLIENT ACQUISITION Consultants have a variety of mechanisms that they use to great effect when acquiring new clients; however, by and large their primary way to acquire new clients is through referrals. FIGURE 4: PRIMARY CLIENT ACQUISITION METHODS CONSULTANT MENTIONS In addition, the consultants told us they also acquire new business in the following secondary ways: Secondary Sources of New Business Targeted Sales Efforts Networking Database Searches Industry Conferences Unsolicited Outreach Business building for these consultants is almost entirely based on referrals from centers of influence, current clients, and providers Oculus Partners, LLC. All rights reserved.

9 2012 Perspectives Study: Retirement Plan Consultants BUSINESS DIFFERENTIATORS The consultants we interviewed vary widely in how they describe their individual practices ranging from holistic approaches to clients benefit plans to specializing in different market segments and/or certain types of services. As one might expect, there was just as much individuality in how they articulated their differentiators, how they add value to client relationships, and why clients choose to work with them. FIGURE 5: STATED DIFFERENTIATORS CONSULTANT MENTIONS Consultant business practices vary widely in terms of areas of focus and how they differentiate themselves. This holds true across both types of consulting firms. CONCLUSIONS These consultants have very close working relationships with their plan sponsor clients. They are often the primary influencers of how the plan sponsor thinks and acts. This is true for provider selection and satisfaction, plan design, investment selection, and participant programs. As such, they are highly important to providers for a multitude of reasons. The consultants in the study represent a wide range of business practices and areas of focus. At the same time, they have a number of things in common such as the types of services they perform, the variety of market segments in which they play, and how they source their clients. Regarding these findings, some of the implications for providers are: Providers who attempt to segment consultants by size of plan may be missing the mark. Providers who focus only on the search, and put less emphasis on on-going partnering with the consultant after the sale may not be setting themselves up for maximum growth. A detailed knowledge of each consultant s business is critical for effective interactions and outreach. Providers who concentrate on helping consultants maximize the value of their referral sources, or who directly provide referrals to consultants may be in the best position to assist consultants in growing their practices Oculus Partners, LLC. All rights reserved. 9

10 T H E P R OV I D E R S E L EC T I O N P R O C E S S H I G H L I G H T S In this section, we concentrate on recordkeeper selections, although many of the practices cited can easily apply to multiple types of providers. Each consultant cited defined and structured processes and methodologies for conducting searches, but they all cited similar evaluation criteria. Two important criteria for inclusion in a search surfaced in the 2012 study -- demonstrated experience in the specific market segment and industry of the plan sponsor, and demonstrated expertise in solving that sponsor s unique problems and issues. Another important factor was having a clearly articulated value proposition that is described in a way relevant to the sponsor s situation. In general, providers were described as struggling with articulating their unique differentiators and value proposition. Other important and frequently cited deficiencies included failure to gain a clear understanding of the prospective client prior to the presentation, carefully completing the RFP responses, adequately preparing for and conducting the finals presentation and site visits, and artfully negotiating fees and selling investment products. By far, the two most common reasons for plan sponsors to initiate a recordkeeper search were poor service and unsatisfactory fee arrangements. K E Y F I N D I N G S In 2012, emphasis is on a provider s perceived strength in a particular market segment, and the provider s demonstrated ability to address specific client needs. The ability to offer integrated DC and NQDC services is critical in the large plan market, with DC/DB integration a critical factor in at least one third of the searches. RMs must be experienced, have good chemistry with the plan sponsor, and be strong enough to act as an effective advocate for the plan sponsor within the provider s organization. 85% of the consultants responded that poor RFP responses have a negative impact on the provider s chances of success, either eliminating the provider from consideration or hurting the provider by creating a negative perception that they then have to overcome. According to the consultants, too often the providers simply read the company s website and assume that this is sufficient for knowing the client. Consultants and sponsors prefer for the finals presentation to be led by the RM, not the sales person, so that the chemistry between the RM and the sponsor can be established. Providers rarely can articulate a clear and concise value proposition, and even more rarely explain how that value proposition will specifically solve that client s needs and challenges. Investments and fees are rarely discussed at the finals presentation, especially in the larger market, but are finalized and negotiated in separate discussions driven by the consultant after the desired recordkeeper is selected Oculus Partners, LLC. All rights reserved.

11 2012 Perspectives Study: Retirement Plan Consultants P R O V I D E R S W H O S TA N D O U T H I G H L I G H T S The consultants provided lists of the providers with whom they have business and are placing new business. As a rule, even for those providers with whom consultants place business, a clear unique value proposition is often elusive. The providers who are winning don t necessarily come to the consultant s mind as excelling in multiple service categories. Four providers seem to stand out in the consultants minds as having clear areas of leadership and expertise. Fidelity for overall scale, capabilities, and reliability; JP Morgan for participant services; New York Life for plan compliance services; and Prudential for retirement income services. A new lens is being placed on a provider s means of customization versus their willingness to customize. The ability to offer customized features within a standard and maintainable structure is seen as more valuable and more cost effective than manual workarounds and one-off processing. K E Y F I N D I N G S For this group of consultants, across all market segments, only 20 providers won recordkeeping mandates for over the last two year period. While these consultants use a small group of providers, these providers can differ by market segment and can change from year to year. Providers have a very difficult time standing out in any particular area. In 10 out of 16 specific service areas, no provider was mentioned by more than one or two consultants. Providers should understand the changing world of ERISA fiduciaries. Providers should demonstrate capabilities that are required by a specific industry or industries. Sponsors feel it is the provider s role to periodically review and evaluate plan fees and offer sponsors the best fee they can. Fee Structures Preferred: Over $100M Plans Under $100M Plans Fee-for-service or per participant fees Fee-for-service or per participant fees Basis points on assets Revenue sharing Any structure as long as it s transparent Basis points on assets 2013 Oculus Partners, LLC. All rights reserved. 11

12 S P O N S O R AT T I T U D E S A N D P L A N D E S I G N T R E N D S H I G H L I G H T S This section focuses on exploring consultant and sponsor attitudes on hot topics that are being emphasized by many providers. These topics included: the objectives of the plan, sponsors interest in retirement income readiness, advanced automatic program features, rollover in and rollover out services, and professional participant advice. The interviews revealed that some of these topics, while high on providers agendas, are not yet captivating the interest of many plan sponsors and their consultants for five major reasons: Incompatibility of philosophies, Concerns over costs and participant reactions, No standard industry-wide approaches, No commonality of services across providers, and Critical industry support issues have not been resolved. If providers want to move the needle in terms of more aggressive adoption of these services and features, these issues and objections need to be overcome with both the consultants and the plan sponsors. K E Y F I N D I N G S When interpreting how sponsors would describe the primary objective for the plan, creating a secure retirement and offering a competitive benefit program are most often cited. The need for a holistic approach and one that goes beyond one size fits all in terms of the assumptions programmed into the various retirement income calculators are seen as barriers to a meaningful solution from providers. According to the consultants, plan sponsors are slowly warming up to the idea of addressing retirement income readiness for their participants; some are already taking real steps to initiate programs that address this issue. Sponsors have not yet developed a philosophy about retaining participants in the plan post-retirement. HR and Finance have differing views on this issue, and other than fee leverage, providers have not made a compelling argument either way. Providers still have a task ahead to convince plan sponsors that more advanced automatic programs are both philosophically sound and not cost prohibitive. Plan sponsors have not yet developed an interest in getting external qualified assets into the plan and keeping assets in the plan post-retirement. This may reflect both sponsor and consultant views as to the benefits of these actions, as well as the inherent conflict many providers have between their IRA businesses and their plan businesses Oculus Partners, LLC. All rights reserved.

13 2012 Perspectives Study: Retirement Plan Consultants P L A N I N V E S T M E N T S H I G H L I G H T S In this section, we analyze who is winning investment management opportunities among these consultants, why they are winning, and why those who are losing are being replaced. Interestingly, when comparing providers utilized for recordkeeping, 16 of the 20 firms listed are also asset managers. However, this duality of capability did not automatically or even often translate into recordkeepers winning asset mandates. DCIO players were prominent on the list of managers frequently used. Investment mandates for bundled providers with proprietary asset management were disproportionate to their recordkeeping win rates, pointing to a solid foothold for strong DCIO players across bundled platforms. Plan investment menus are designed with completely structured and objective criteria unique to each consultant. Mutual funds are still the dominant vehicle preferred with collective trusts, model portfolios, and SMAs in strong secondary positions. Menus are dominated by target-date QDIAs, broad but simple categories of assets, and a mix of active and passive options, all with transparent fee structures. Stable value and self-directed brokerage continue to be popular options. Company stock has been primarily relegated to a legacy position, not an active option.. K E Y F I N D I N G S The number of investment vehicles and the types of investment service platforms continue to expand, but given the recent popularity of ETFs in the retail wealth management market, there is still surprisingly little interest among retirement plan consultants. Nearly 95% of consultants indicated that target-date funds were the QDIA and, as such, have a prominent role in investment menu construction. Beyond that, responses indicated that simplified menus that are broad enough to cover most asset classes were also critical. Today s consultants have well-developed screening and evaluation criteria and tools, often unique to the consultant or their firm. Investment managers must understand these unique approaches to effectively identify and win new opportunities, and retain assets at risk. Winning recordkeeping mandates does not appear to automatically drive investment management opportunities. Each must be won on its own merits. DCIO providers are becoming more sophisticated in their marketing techniques. Bundled providers are winning business on a DCIO basis more aggressively than ever. When it comes to investment fees and costs, however, transparency is the best descriptor for the best practice of Where sponsors are still opting for revenue sharing to avoid seeing a recordkeeping/administration line item on participants statements, consultants are now looking for caps on the total fees and depositing the surplus into an account within the plan, to be used for the benefit of the plan. a standard operating procedure rather than a one-off process for providers. This demand is making the ERISA Account now 2013 Oculus Partners, LLC. All rights reserved. 13

14 O B S E R VAT I O N S A N D A C T I O N A R E A S In our detailed findings report, we included in each section a robust set of conclusions and ideas for providers. In this highlights report, we have included our perspectives at a more strategic level on the implications of the findings overall. EVOLVING DYNAMICS As we began this analysis, we had a bias of cautious optimism about the impact these consultants are having on the retirement marketplace, and the provider opportunities we would uncover or confirm. We now complete this work absolutely convinced that in all markets, but especially in the larger retirement market, consultants will continue to evolve as leaders in the provider/sponsor relationship, both at the sale and as an on-going partner in the relationship. And just as each plan sponsor is unique, each consultant is unique. This dynamic is just as impactful for an investment manager as it is a recordkeeper or other provider. So, developing an understanding of each of the key consultant s practices, processes, preferences, and perspectives is critical to maintaining and growing a healthy retirement business. Historically from the provider s perspective in the larger markets, the sponsors and providers have dominated the interaction, with the consultants viewed as assisting primarily with RFPs and investment manager evaluations. These dynamics are changing. Consultants are using public, purchased, and proprietary benchmarking tools and are building and maintaining robust databases that evaluate providers capabilities and track record, as well as fees and fee structures. The transparency that has come about due to both regulatory and competitive factors is changing retirement plan sales and relationship management in ways we are still learning. consultants as a primary on-going partner will risk being dis-intermediated over time. Providers who don t view New approaches to consultant relationship management must evolve along with these changing dynamics. New talent, tools, techniques, and technology are required to effectively tell your story as a provider, and prove that you live what you promise every day. Providers now need to learn new information from consultants as much as consultants need to learn from providers. COMPETITION AND COMMODITIZATION Perhaps one of the most disheartening set of findings from the study was the disconnect between who many providers think they are, and who they show themselves to be through how they position themselves in sales and client relationship management. These are solvable problems. They may not be easy depending on the organization and culture, but they are fixable with the right amount of focus and leadership. Selling and retaining loyal customers is harder today than ever. There is more information, there are more choices, and the competition is fierce. Providers are often seen as commoditized because they have allowed themselves to lose their focus and their uniqueness. Learn what your story is, and how to tell it in a way that is relevant to your audience. Don t be sloppy. Do your homework. Pay attention to service quality. These are not complex fixes, they just require a focus on flawless execution. And, as importantly, once you know who you are, you will be able and confident in clearly articulating who you are not. Today, consultants are having to make their own decisions about the business for which providers are suited, as the providers aren t clearly stating where they excel Oculus Partners, LLC. All rights reserved.

15 2012 Perspectives Study: Retirement Plan Consultants THE GREATER GOOD In terms of retirement income readiness, automatic programs, retirement income management, and asset consolidation, there are clear disconnects between what providers are talking about and investing in, and the current interest level of the consultant and sponsor community in those topics. The onus is on providers to bridge this gap by developing more compelling arguments, by designing and innovating to overcome objections, by harnessing the power of the industry to advocate, and by deploying enthralling marketing and communications tools. Employer plans are under a microscope at the individual, corporate, and government levels within the U.S. and around the world. Are they working? What is working best? Can the country afford the programs? Are there solid ways to invest the funds for growth and protection? Will they be effective at supporting the retirement needs of the Boomers and beyond? If these or other changes will make employer plan programs more successful, now is the moment for transformation. And, not only can adoption of new philosophies and features benefit participants, sponsors, and the country as a whole, providers can benefit as well. Times of transformation are times when markets experience tectonic shifts. Remember the rise of the mutual funds, and the rise of the target-date funds. New leaders can emerge, and early adopters can win. We see consultants open to change and seeking new paths to success for their clients. MOVING AHEAD Providers across most of the mid to jumbo segments have an opportunity to invigorate their growth by partnering more effectively with the consultant community. This growth can come by simply retaining more business, by optimizing the business you have, and by winning new relationships through these partnerships. To accomplish this it isn t just a new way of selling that is required, it is a new way of thinking and acting across the entire provider organization. This type of transformation doesn t happen overnight or without focused strategies, planning, and execution. We are completely convinced that it is possible to win no matter what type of firm you work within a bank, an insurer, a broker/dealer, an RIA, a consulting firm, a mutual fund complex, a small asset manager, a TPA, or a technology firm. We see the possibility of positive transformational shifts ahead for the providers who can harness the power of strong consultant partnerships Oculus Partners, LLC. All rights reserved. 15

16 Let s talk about how the power of Oculus can help put you on the path to success. For more information visit our website at