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It has been another strong year for specialist US retirement advisers, with assets and clients on the up — but pressure on fees is also rising.
Employers that sponsor defined contribution retirement schemes such as 401(k) plans are relying more heavily on financial advisers to guide them on the design of such pension schemes.
That is the message from the advisers listed in this year’s FT 401, the fourth annual list of top DC plan advisers in the US. They saw such assets grow on average 26 per cent year-on-year in 2017, thanks to new client wins and rising markets. FT 401 advisers advise on an average of $1.3bn in DC plan assets, across corporate, non-profit and government employers.
Another sign of progress is greater workplace engagement. The FT 401 advisers estimate 77 per cent of staff participate in clients’ DC plans, up slightly from 74 per cent last year.
One reason is that more organisations have switched from encouraging employees to enrol in pension plans to automatically enrolling them and allowing them to opt out. This year’s FT 401 advisers say 50 per cent of their DC clients use automatic enrolment, while only 37 per cent did so in 2015.
Advisers are also increasingly seeking out low-cost investment options for these plans, including passively invested index-tracking funds. Among the FT 401, passive funds have risen from 27 per cent of DC plan assets in 2017 to 33 per cent this year.
This has pushed down fees. The Investment Company Institute says the 401(k) investor saw the average expense ratio for an equity mutual fund fall from 0.51 per cent of assets in 2015 to 0.45 per cent in 2017.
The pressure for low costs has extended to advisory fees, too. While last year’s FT 401 cohort cited regulation as its biggest challenge, the 2018 group says it is to lower their fees. Those stresses are encouraging advisers who merely dabble in DC plans to exit the business in favour of the specialists that make up the FT 401 — where DC plans account for four-fifths of overall client assets. They have an average of two decades’ experience with such schemes.
The FT 401 advisers hail from Washington and 38 states. The states with higher populations understandably have more advisers on the list. California leads the way with 45 advisers. It is followed by Texas, with 28 advisers, and Massachusetts and New York tied with 27.
The pressure to lower costs dominates the DC market even as regulators step back. A Department of Labor rule requiring broker-dealers as well as advisers to act as fiduciaries and put their clients’ interests before their own went into partial effect in 2017. The rule died, however, after a US Circuit Court ruling in March vacated the regulation.
In April, the Securities and Exchange Commission proposed a rule forcing broker-dealers and advisers to disclose potential conflicts of interest in all accounts, not just retirement accounts. But the SEC’s draft rule does not explicitly hold all brokers and advisers to the “fiduciary” standard, provoking debate as well as speculation that the agency might make changes to its proposal.
A big reason DC plans continue to focus on lowering their costs is for fear of lawsuits. Employers have a fiduciary obligation to treat their employees’ DC plan savings as their own, an obligation that gained much attention as a result of the Labor Department’s shortlived “fiduciary” rule. The risk of litigation over costly or conflicted investment offerings in DC plans is ever present.
Employees and law firms filed 107 lawsuits against 401(k) plans over 2016 and 2017, the highest two-year total since the 2008 financial crisis, according to the Center for Retirement Research at Boston College.
More employers want their DC advisers to share the fiduciary responsibility. The portion of FT 401 advisers providing that service has increased from 44 per cent back in 2015 to 66 per cent this year. Against this backdrop, the elite specialists have attracted more business; nine in 10 of this year’s FT 401 increased their DC plan client numbers in 2017.
With pressures mounting in the retirement plan market, the FT 401 provides a snapshot of the best advisers, nudging DC plans towards more effective outcomes for employees.
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