Financial professionals and the 401(k) landscape

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1 The value of an advisor As a professional financial advisor, you play a critical support role for small- and mid-sized plan sponsors who are overwhelmed with information, regulatory updates, and retirement plan options. For plan sponsors, their business is the number one priority and focus. When it comes to their 401(k), they rely on your expertise and they often seek a financial advisor whom they can trust to run their plan. Opportunity for growth The 401(k) market for small companies represents tremendous opportunity for financial advisors looking to grow their business. of defined contribution (DC) plans have less than $10 94% million in assets. * 67% 54% of the assets for plans with less than $50 million are advisor-influenced. ** of plan sponsors value insight above all else in their interactions with advisors (above service and investment returns). *** * Cerulli, Retirement Markets 2014: Sizing Opportunities in Private and Public Retirement Plans. ** Vanguard, *** Corporate Executive Board Company, 2014 Small Business Owner Survey. Helping plan sponsors 85% of financial professionals offer services for retirement plans. * 7% of them are considered retirement specialists, with more than $250 million in retirement plan assets. * Retirement advisors 99 Providing support As a financial professional, there s a wide range of services you can offer to support sponsors and participants in 401(k) plans. Services offered by retirement plan specialists include: Participant guidance Participant advice Rollover services Annual investment review average number of retirement plans under advisement. * average assets $500M under administration. * * Investment committee meeting support FPLNDVAL

2 The role of a fiduciary As plan sponsors evaluate the nuances of their fiduciary duties, they often turn to financial professionals to guide and support them. More financial professionals are now offering fiduciary services as part of their practices because these services add value for plan sponsors. Offer services, build your business 71% of retirement plan advisors indicate that offering fiduciary services is important to winning a plan. What fiduciary services do advisors offer? 79% 25% offer 3(21) offer 3(38) services services Source: Vanguard, Types of fiduciary services Fees for fiduciary services Financial professionals may offer ERISA fiduciary assistance to plans in various ways: 3(21) services. An investment fiduciary provides investment recommendations to the plan sponsor, who may accept or reject those recommendations and must then execute the investment decisions for the plan. Ultimately, the plan sponsor retains decision-making authority for the investments and must monitor the performance of the 3(21) fiduciary. Fiduciary services fee models: I have a base fee for my services and charge an additional fee for fiduciary services The fee for fiduciary services is built into my base fee and I would decrease this fee if not acting as a fiduciary 28% 31% 4 52% 3(38) services. An appointed investment manager that may select, monitor, remove, and replace the investment options offered under the plan. The 3(38) investment manager has full fiduciary responsibility for its investment decisions. However, the plan sponsor is still responsible to monitor the performance of the 3(38) fiduciary subject to the terms of the plan documents and its investment policy statement. I do not charge for acting as a cofiduciary Other 24% 20% 3(21) 3(38) FPLNDFID

3 Working with a third-party administrator (TPA) Retirement advisors seeking additional expertise to guide their clients on plan design or compliance decisions may decide to partner with a TPA to help relieve the administrative burden typically involved. TPAs are very prevalent among smaller plans; they serve 20% of such plans, accounting for more than $800 million in influenced assets. Source: Vanguard, as of June 30, The prevalence of TPAs 7 50% of retirement advisors work with a TPA on at least one plan. of the retirement plans they advise work with a TPA. Five reasons advisors work with a TPA: Already have an established relationship with a TPA. Seek an expert local to the plan sponsor. Desire a custom plan document. Want a 3(16) provider. Need help with plan design. TPAs add value Half of retirement advisors view TPAs as a strategic partner, and they rely on a TPA to offer a variety of services that include: Compliance testing services. Custom plan documents. Loan administration. Plan design support. Enrollment support. Education. 3(16) services TPAs are increasingly acting as 3(16) fiduciaries, where they take on day-to-day responsibilities for running a plan. Financial professionals can rely on their administrative expertise to guide plan sponsors on duties that may include, but are not limited to: Interpreting plan rules and documents. Processing approved claims and loans for distribution. Making administration recommendations. FPLNDTPA

4 Investment menu selection and design With increasing investment regulation, refinement of fiduciary standards, and demands for fee transparency, plan sponsors are looking to financial professionals to ensure they are offering a best-in-class retirement plan that gives their employees the strongest foundation toward investment success. Number of funds 60% 24 Preferred type of fund management Actively managed Passively managed Both active and passive options No preference of retirement plan specialists prefer to have more than 20 funds in a lineup. Average number of funds offered in a plan with a retirement advisor. 11% 3 47% Model portfolios Model portfolios are increasingly becoming a differentiator for some advisors. 57% of advisors do not charge for model portfolios. Unitized models that only include funds available to all participants Nonunitized models that include only funds available to all participants Nonunitized models that include assets that participants cannot invest in Unitized models that include assets that participants cannot invest in Other 1% 9% 15% 2 48% Participant activity 87% 65% % have balanced strategies. use target-date funds (TDFs). Average number of funds used. use model portfolios. Professionally managed accounts Sponsors reenroll participants into TDFs, and advisors encourage participation in professionally managed accounts. Single-TDF participant Percent defaulted 29% 5% Managed account participant Average age 40.4 years 49.2 years Median balance $5,438 $54,698 Average tenure 5.2 years 14.3 years FPLNDINV

5 Retirement plan fees made easy As a financial professional, you re intent on growing your book of business in the retirement planning space. However, heightened awareness of fees and increasing competition are contributing to fee-related pressures. By understanding and implementing a transparent fee structure, you have the flexibility to set your advisory fees based on services rendered. Vanguard Retirement Plan Access TM advisor fee ranges Advisor compensation structure (average percentage of revenue) 90 Fee-based 53% Median fee Commissionbased 34% Basis points Other compensational model 23% Less than $1 million $1m to $2.5m $2.5m to $5m Advisor fees may be calculated as a percentage of plan assets, a tiered fee schedule, or a flat dollar fee. 20 $5m to $10m $10m to $25m Fee allocation preferences 71% 29% pro rata (based on account balances). per capita (equally among participants). FPLNDPRC