By Cyril Tuohy
Financial advisors emit a “halo effect” on small businesses that rely on advisors to structure 401(k) plans. Small plan sponsors report better retirement plans across eight separate metrics, a new survey has found.
The survey also underscores how much opportunity there is for financial advisors who want to pursue the small-plan market.
Small plans managed by financial advisors are more likely to have any number of features that sponsors say improve plan design.
Those features could include the employer match, tools and calculators, target date retirement funds options, income replacement ratios based on plan balances, managed accounts for which participants pay extra for professional advice, and automatic step-up contributions.
The findings emerged from The Guardian Small Plan 401(k) RetireWell Study conducted by Brightwork Partners on behalf of Guardian Retirement Solutions. The survey queried for-profit organizations that have between 25 and 249 employees and have been in business for three years or more. The survey was conducted between Nov. 12 and Dec. 14, 2013.
“Financial professionals can and do help,” authors Merl W. Baker and Ronald L. Bush, principals at Brightwork Partners, write in the study’s conclusion. “Not just when it comes to fiduciary issues, but in every aspect of designing and servicing a plan.”
Advisors benefit from the “halo effect” in areas where they have little direct impact on the plan, such as how well the plans help plan sponsors recruit and retain employees, keeping small employers competitive in terms of benefits, helping employees retire with adequate income, and providing tax advice to the plan sponsor.
Plans that work with an advisor see a 15 percent increase in the “perception of success” for each of the four items compared to plan sponsors that don’t work with advisors, the survey also found.
The fact that advisors deliver a better plan isn’t exactly new, but the study serves as a reminder of the value advisors provide to millions of workers employed by small businesses and covered by retirement plans.
Enrolling employees in a retirement plan is one of the most convenient ways to help workers prepare for retirement, according to retirement policy experts. Surveys find that workers like the defined contribution system because it is easy, convenient and portable.
“Nothing in our history has helped promote retirement savings more than workplace defined contribution plans, and this study tells us that the vast majority of small-business owners who offer 401(k) plans are satisfied with both the plan itself and their plan providers,” said Douglas Dubitsky, vice president at Guardian Retirement Solutions.
Small-business owners, however, shy away from offering retirement plans because owners find them expensive and burdensome.
Critics of the 401(k) system have also pointed out how difficult it is for workers to know how much advisors are charging them in fees to manage the plans.
Conversely, financial advisors ignore small plans because small plans are less profitable than larger ones. Because the small plan market is more fractured than midsize and jumbo markets, small plans require more work relative to the fees the plans generate for advisors.
Still, the survey found there was a lot of opportunity for advisors, particularly around fiduciary aspects of the plans’ responsibilities.
Almost one-third of small plan sponsors do not understand that they are a plan fiduciary, the survey also found. Plan sponsors in violation of their fiduciary duty expose themselves to potentially expensive litigation.
Only 37 percent of small plan sponsors were deemed to have excellent fiduciary awareness. Another 31 percent were found to have average fiduciary awareness, and still another 32 percent had poor fiduciary awareness, the online survey of 451 senior executives found.
“Fiduciary confusion is deep and distressing in this community,” Baker and Bush wrote in the conclusion to the survey.
More than half the small business plans surveyed say they choose the lowest-cost provider they can find “even as they misunderstand or misinterpret their fiduciary responsibilities,” the authors wrote.
Only 46.2 percent of retirement plans with between 1 and 49 participants retain an independent advisor to help with fiduciary responsibility, according to the Plan Sponsor Council of America’s 56th Annual Survey published last year.
The PSCA survey also shows that 40.5 percent of plans with between 1 and 49 participants choose to pay independent advisors through a fixed fee, and 52.4 percent of them through a percentage of plan assets, the PSCA survey found.
The percentage of employees who take advantage of investment advice when it is offered is highest among small plans compared to the percentage of employees at large companies, the PSCA survey found.
Among plans with between 1 and 49 employees, 38.9 percent of participants used advice, compared to 12.8 percent of participants at employers with between 1,000 and 4,999 employees, PSCA data show.
When plans with between 1 and 49 participants offer advice to employees, 20.7 percent of those plans offer advice from a certified financial planner (CFP), 51.7 percent from a registered investment advisor (RIA), 6.9 percent from an advisor affiliated with a plan provider, and 20.7 percent from a Web-based provider, the PSCA survey found.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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