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Reshaping Retirement: 3 Trends that Should Influence Your 2020’s Sales Strategy

By Ben Thomason and Fred Barstein

As legislation and technology drive change in the retirement plan market, we are seeing record-breaking rates of consolidation, impactful new regulation such as the SECURE Act, and shifting strategies including the growth of managed accounts. Moving into 2020, Fred Barstein and Ben Thomason are breaking down why these trends have taken flight and what they should mean for your retirement plan business strategy.

Trend #1 Changing Regulation Around Open MEPs/PEPs

There are 5.8 million businesses in the US with100 or fewer employees, and of those, 90% do not have a retirement plan. The SECURE Act was passed in an effort to close this retirement gap, with significant changes made to Open Multiple Employer Plans (Open MEPs), now referred to as Pooled Employer Plans (PEPs). Previously, “open” MEPs could cover multiple, unrelated employers, but all plans needed to file their own 5500s and were subject to the “one bad apple” rule which made them highly risky to sponsors. The SECURE Act introduced PEPs, which are essentially Open MEPs, but they can be offered to unrelated companies with only one 5500 filing and without the one bad apple rule. They must be serviced by a pooled plan provider (PPP). The PPP takes on the role of named fiduciary, plan administrator, and the organization responsible for performing all administrative duties.

PEPs also greatly reduce the plan administration lift through a single plan document, a single Form 5500 filing, and a single independent plan audit, all led by the PPP. They also have streamlined fiduciary oversight, minimizing the legal responsibilities a plan sponsor would need to manage. Finally, PEPs will likely appeal to those small employers who believe plans are too expensive and difficult to administer, and allow them to band with others to access an institutional quality infrastructure they’d otherwise have to build – and pay for – on their own.

What this means for advisors

Retirement plans are sold, not bought, so while new legislation was meant to address accessibility, that wasn’t necessarily the problem. Instead, the problem was around the complexity of plans and misinformation around the cost and time investment for small employers. That being said, just because the SECURE Act passed, does not mean companies are running to the gates – they need to be made aware of the improvements that were made. PEPs create an opportunity for advisors to market small plans in an entirely new way and alleviate concerns smaller companies have around the investment it takes to run a plan.

It’s also worth thinking about the opportunities PEPs create for those around you. This structure makes it easier for financial institutions outside of retirement – such as insurance and benefits providers, among others – to enter the market and cross-sell their existing services while gaining low priced access to the participant. To get a leg up, you may feel inclined to create your own offering, but standing up your own PEP is no small feat. It comes with significant expense and time. Partnering with a broker-dealer or recordkeeper, rather than trying to form your own, can be a more effective way to enter the market.

We also recommend thinking about other partnerships (payroll companies, associations, etc.) that offer marketing access to small businesses and still offer effective ways to scale through not only PEPs, but also traditional MEPs and even your own non-MEP solution. Check out our previous Vestwell U webinar on associations for help on how to tap into this market or our session on traditional MEPs if you’re looking for more information on how they operate.

That being said, just because PEPs are now easier, doesn’t mean they’re always the right option. You can often replicate the same benefits around price and administrative lift elsewhere. There are already a number of recordkeepers offering similar low cost, institutional pricing, and in some senses, you can provide the same value without waiting for 2021 or putting in the investment of standing up a new initiative.

Trend #2: Continued Industry Consolidation 

It’s no secret there has been major consolidation across the retirement industry, from recordkeepers, to TPAs, to advisory firms and beyond. Just last year the RIA industry underwent record M&A activity for the 7th year straight and recordkeepers have consolidated  from more than 400 just a decade ago to about 160 in 2018. We anticipate this continuing since recordkeeping is a relatively undifferentiated product in an industry with high barriers of entry. Consolidation also helps providers combat the significant drop in participant fees over the past 10-15 years. As recordkeepers take advantage of economies of scale, they can invest in better technology, cut costs, and drive additional revenue through other products such as managed accounts.

What this means for advisors

Consolidation is helping RIAs and recordkeepers not only build out their offerings, but it’s also putting them in more direct competition with one another. For example, large RIAs such as Pensionmark now have participant call centers, among other services, that were traditionally only offered by the recordkeeper. Recordkeepers, on the other hand, are encroaching upon core competencies of the advisor by becoming more participant focused, often in the hopes of competing for the wealth business on the back end.

To combat the heightened competition, advisors should consider the long term nature of their recordkeeper partnerships. There is already a growing fear among advisors that occurs when they move clients to a recordkeeper whose competencies overlap with their own or who is competing with them for wealth business on the back end. There is also increasing frustration around recordkeepers refusing access to participant level data, so it’s important to take your own business plan into consideration when determining where to place your clients’ plans.

Trend # 3: Increased Attention on Managed Accounts

401(k) managed accounts have become more and more popular over the past 5-10 years with the amount of money in these accounts increasing from about $100 billion in 2012 to over $270 billion in 2017. The trend of managed accounts is likely driven by two currents: 1)  Fee compression, as these products are a way for advisors to charge (and justify) higher fees and 2) Growing frustration around the stagnant nature, and ongoing conflicts, in current offerings including target date funds.

What this means for advisors

If you don’t have a point-of-view or an articulated solution for a more customized investment structure for participants (ie. a managed account), it’s important to start thinking about one. Aside from fiduciary risk, which leaves you and your plan sponsor vulnerable, it creates a real opportunity to get closer to the participant. That being said, while managed accounts give advisors a better tool to assess appropriate risk for clients, that doesn’t mean they are right for everyone. Target dates funds (TDFs) will likely suffice for most participants under the age of 50 unless they have a lot of investable assets. For those over the age of 50, we recommend implementing a “QDIA 2.0,” to auto-enroll clients into managed accounts which will offer them a more customized approach as they near retirement. Without making managed accounts a QDIA, adoption will be tough.

Looking ahead

For a notoriously slow-moving industry, these trends signal that changes are underway. Better yet, several of the trends are aimed at improving things for sponsors and participants. With PEPs, reduced administration and liability make balancing a plan while running a business more manageable. When it comes to industry consolidation, lower fees and better technology mean participants have more money going into their accounts while gaining access to a better experience. As for managed accounts, greater access to a customized approach can help those nearing retirement feel more comfortable with their investments. In turn, these trends help advisors to more strategically align with their client’s needs and market around them. As you build your 2020 plan, it’s important to maintain a pulse on the direction of the market and continue to flex your strategy in a way that best aligns your vision to the needs of your clients.

 

 

President Signs SHRM-Backed Measures that Include Cadillac Tax Repeal

By Stephen Miller, CEBS

Congress overwhelmingly passed and President Donald Trump has signed into law an end-of-year spending bill and a companion tax extenders measure that contain several agenda items championed by the Society for Human Resource Management (SHRM), including full repeal of the so-called Cadillac tax on high-cost health plans. The SECURE Act, a measure to promote savings by easing compliance burdens on defined-contribution and defined-benefit retirement plans, was attached to the appropriations bill.

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SECURE Act Alters 401(k) Compliance Landscape

By Stephen Miller, CEBS

President Donald Trump on Dec. 20, 2019, signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a bill to help employers create and run retirement plans for workers. The Society for Human Resource Management (SHRM) strongly backed the measure, which the House first passed in May and the Senate approved on Dec. 19 as part of a year-end appropriations package.

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Why Does the Plaid Acquisition by Visa Matter?

By Aaron Schumm, Founder & CEO, Vestwell

Old meets new: How Visa’s acquisition of Plaid validates high demand for modern infrastructure across financial services

The financial services industry has been hindered by years of precedent – antiquated technology, safeguarded data, and closed systems. Yet Visa’s recent acquisition of Plaid sheds light on what’s to come. Visa didn’t acquire Plaid for its revenue (estimated at around $150 million and having contributed only 30-40bps of net revenue growth in 2020), but for its access within a modern infrastructure. Some might say that Plaid is purely defined by access. Its central offering is the ability to connect different applications in a way that makes the flow of everything from data to money a seamless experience. Through an infrastructure that can flexibly work with financial institutions in a modernized fashion, Plaid sets the stage for bringing Visa’s tools and services to life across the customer journey.

You don’t have to go out with the old to come in with the new.

Today’s modern tech stacks allow for more flexible, configurable, and efficient systems, which is why we saw over $128 billion in fintech acquisitions in 2019. Being the engine is a powerful way to build a business that scales, especially in the aging financial services market. In a world where consumers are taking a more holistic view of their financial wellness, connectivity becomes a critical factor across the thousands of providers in the ecosystem. Providers hoping to service these consumers, especially those built on older systems, must look outside their institutions and think strategically about how to best support the end-user.

So why is this important? Because having the right infrastructure in place has significant downstream implications. Traditional financial institutions cannot merely scrap their infrastructure and start fresh. Working within a legacy ecosystem, while modernizing the core of data movement and connectivity, is powerful.

Just as Visa is leveraging the Plaid acquisition to gain better connectivity, data, and access, so can these same benefits be realized in other markets. We see it happening on the payments side with Stripe as well as in the retirement space. In each, traditional providers are working off antiquated technology that wasn’t built to talk to anything else, yet the provider and the consumer can’t make proper, big financial decisions without modern structures in place.

Engines scale, vanity wanes.

Building a B2C business is always attractive… at first. It’s the idea of “what if we created and became the next [fill in the industry-leading brand name here]?”. But in financial services – an industry touching the 2nd-most sensitive thing in someone’s life, behind family – building a brand that one can truly trust is expensive.

There will not be one winner in a free market Finserv/Fintech industry, but there will be clear leaders. And those leaders will not be dethroned easily. This creates an even more attractive case to power the established leaders, enhancing areas of weakness, and emphasizing those of strength through modernization.

Better data yields, better experiences.

The banking, wealth, and retirement worlds have been reticent about providing data across partners. This is partly a business play, and partially a gap in capability. However, in a day and age where information is often readily available and where AI facilitates smart decisions, opening up clean data can be powerful in helping users make better decisions and, ultimately, enjoy a better user experience. Visa, for example, will now know not only transaction patterns and cash flow, but also a consumer’s assets and liabilities, so they can better offset risk and cash flow. They’ll also be able to tie in any applications and services that align to specific user needs.

Allow others to do what they do best and connect the rest.

It’s difficult to be all things to all people. Leveraging open architecture will drive efficiency. While M&A gives companies the ability to grow or streamline capabilities, there are always going to be competencies best left to someone else. Putting the infrastructure in place to take advantage of user synergies can significantly enhance the user experience. For example, eliminating multiple logins, ensuring consistency of data, and reducing bottlenecks, will save time and, ultimately, money, while a customized user experience will create retention.

Everyone wants to own the (extensive) participant journey.

Many in financial services find themselves embroiled in a space race to own the participant journey. In retirement, there’s an appetite for managing everything from benefits and wellness to managed accounts and lifetime income. In payments, it’s purchases and cash flow to assets and liabilities. Yet legacy technology inhibits integration, scale, and data. Plaid is an enabler for greater access, and this recent acquisition highlights how today’s modern mainstream will power financial services into the next chapter.

About Vestwell.

Vestwell is a digital retirement platform that makes it easier to offer and administer plans. By combining advanced technology with a human approach, we remove traditional friction points related to onboarding, management, administration, pricing, and compliance. The result is an unconflicted and customizable offering that provides a modern experience for all involved. Read more at www.vestwell.com.

Cyber (In)Security: Why Retirement Plans Are at Risk and How to Protect Them

With 401(k) plans holding trillions of dollars in assets — along with personal information such as social security numbers, bank account information, and more — it’s no wonder they’ve been subject to recent cyberattacks. As fiduciaries, advisors and plan sponsors are wondering what exactly they are liable for and how to protect their plans. Vestwell’s December 18 panel, featuring cybersecurity expert Joe Pampel and retirement law expert Jason C. Roberts, explored this very topic.

What are fiduciaries liable for?

As of now, ERISA and relevant case law are silent about the extent to which fiduciaries are liable for data security violations, though there are numerous state and federal law theories that may hold them liable for a variety of monetary damages. As the law in this area evolves, the following legal principles are becoming well-settled:

  1. Protect plan data. Plan fiduciaries are required to protect all plan assets. Although it is unclear whether participant data is considered a “plan asset,” fiduciaries should be cautious and take reasonable steps to keep sensitive plan data out of criminals’ hands.
  2. Vet service providers. Fiduciaries must prudently select service providers, such as their payroll vendor and recordkeeper. Part of selecting these vendors is asking about how they protect participants’ personal information and understanding their overall security procedures.
  3. Ensure other fiduciaries don’t breach their duties and take steps to remedy any known breach. This is a mouthful, but it simply means that advisors and plan sponsors should make sure other fiduciaries fulfill their duties and, if there is a security breach, take the necessary remediation actions, which may include replacing the service provider.
Selecting the right providers

We’ve already addressed how plan fiduciaries are responsible for vetting their service providers, and since cybersecurity is a critical part of the selection process, it’s important to ask the right questions.

  1. How do they manage data? This can be as simple as asking providers how information flows into and out of the recordkeeping system and who has access to personal information. Ask if the data is stored in the United States or abroad and how they back data up, such as whether it’s stored on backup tapes or in the cloud. Ask about the vendor’s background screening of its employees and how often those checks are updated.
  2. Do they offer contractual protections? Plan fiduciaries should include contractual protections to hold third parties liable for security breaches. This can include things such as requiring the provider to notify you within a few days of discovering a data incident as well as verifying sufficient cybersecurity insurance coverage.
  3. Have they had any historical breaches? In addition to asking providers what steps they are currently taking to prevent attacks, ask them about any breaches they have had in the past, how they were resolved, and how often they undergo security audits. Also ask these questions of any subcontractors they use, as those are often overlooked in the vetting process.
Protecting your own business

In addition to selecting secure vendors, plan sponsors should also make sure they are taking necessary steps to protect their own plans by:

  1. Getting insurance. Just like third party vendors, sponsors can and should obtain cybersecurity insurance to help protect assets in case of a breach of its own security systems.
  2. Monitoring plan statements. Sponsors should review plan activities such as unusual and/or large withdrawals, and educate participants to do the same.
  3. Ensuring data security. Just as one would ask a service provider about its processes, it’s important to understand how sensitive data is shared internally. Sponsors should restrict access to only those employees who need it.
  4. Reviewing providers (at least) annually. Sponsors should use the steps above to analyze providers’ security practices at least once per year, if not more often.
  5. Educating employees. Employees should receive training at least annually on ways to mitigate the risk of a cyberattack. This includes things such as picking complicated passwords, implementing multi-factor authentication, monitoring account activity, and only accessing their plan on secure devices.

Although ERISA does not include any specific rules when it comes to cybersecurity, fiduciaries are responsible for protecting their retirement plans. From restricting access to plan data to properly vetting service providers, there are practical steps advisors, plan sponsors, and even participants can take to mitigate the risk of a cyberattack.

Signed, Sealed, Delivered: What the Passing of the SECURE Act Means For Advisors

The “will they, won’t they” surrounding the SECURE Act has finally come to an end and the most impactful retirement plan security legislation in decades has been signed into law. This will not only make retirement plans more accessible and affordable for the 500,000+ small to mid-sized businesses currently sitting on the sidelines, but it should also result in more Americans saving for retirement, thus starting to bridge the huge savings gap. For advisors, this opens up a significant opportunity, especially for those who have already recognized the potential in the emerging corporate market.

If, as an advisor, you’re wondering which of the 124 pages of legislation to pay most attention to, here are some of our thoughts:

Allowing for open Multiple Employer Plans (“MEPs”)

MEPs have perhaps been the most heavily talked about part of the SECURE Act. While closed MEPs  – in which companies with clear commonalities can offer pooled plans – already exist, allowing unrelated businesses to pool resources has a lot of advisors, PEOs, payroll providers, and others excited. This should conceivably help smaller plan clients gain access to provisions and investments that were traditionally available mostly to larger plan clients. That being said, it’s important to be aware of certain restrictions of MEPs including the standardization of investment options, fiduciary oversight of service providers, plan features like matches and contributions that some sponsors might not be prepared to handle, and other operational hurdles. Employers can be liable for significant damages for jumping in too quickly. It’s worth comparing whether a MEP-like experience, in which one creates their own pooled offering without the confines of a MEP, could be an even better option. Either way, the passage of the SECURE Act opens up the door for you to be having these important conversations.

Access to annuities in retirement plans

More relaxed rules around lifetime income products means better access to more offerings for participants. This is a good thing considering there is no one-size-fits-all when it comes to a participant’s investment strategies and annuities could be a great option for the right investor. However, there is still a lot here to figure out. Because of the complexity of annuities, it can be challenging to incorporate them into a retirement plan without full plan portability or properly disclosing costs and other features. Expect a lot of big annuity players to try to simplify this complex challenge sooner rather than later.

Tax incentives for small business owners to offer a 401(k)

Since much of this provision is centered around making retirement plans more accessible for small business owners, a tax credit of up to $5,000 should serve as a great catalyst. Not to mention that it can help offset any upfront costs that often serve as a deterrent in setting up a plan. Be sure to lay out the numbers for prospective clients, as most of them aren’t following the SECURE Act nearly as closely as we are.

Looser restrictions on eligibility

For example, there will no longer be a heavy penalization on those taking parental leave or working part-time. According to the bill, employees who work 500 or more hours during any consecutive three-year period can participate in their plan and there are other protections in the Act for part-time employees. This is meant to protect participants who may take a leave of absence for parental leave or otherwise, and to generally support more balanced life decisions. This is a shift from the current eligibility rules so it’s important to alert clients to ensure compliance.

New age requirements for Required Minimum Distributions (RMDs)

People are living longer (and often working longer!), so the Act has raised the age from 70 ½ to 72 for employees to begin cashing out their retirement plans. For wealth advisors in particular, this is an important number to (re)factor into long-term planning.

With all of these employer and employee benefits, how is this Act being paid for? Well, there are a few provisions where the revenue stream can help offset the cost.

Eliminating the Stretch IRA

By removing the so-called “Stretch IRA,” certain beneficiaries of a 401(k) plan can no longer hold off paying the tax penalties on withdrawals in perpetuity. This means taxes may now need to be paid within ten years, depending on who the beneficiary is at the time. Again, advisors should make clients aware of this change as needed.

Increasing fees for late or missing Form 5500s

While there have always been hefty penalties for mishandling of 5500s, the fee has increased significantly from a maximum of $50,000 to $150,000. This is an important note for sponsors, but also for the named Plan Administrator who may be ultimately responsible for timely filing the Form 5500.  

With the exception of the long-term, part-time employee provisions which are effective in 2021, most of these other changes are effective for plan years beginning on or after December 31, 2019.  Yes – – just two weeks from now. Of course there is much more to the SECURE Act including changes to 529 college savings plans, penalty-free withdrawals for the birth or adoption of a child, and others, but by better understanding the imminent changes affecting retirement plans, the impact of the law becomes more clear. While it’s important to lay out a thoughtful strategy for incorporating the Act into your business plan, it’s equally important to think about the downstream implications – good and bad – to your clients. Regardless of how you shift your strategy, the passing of the SECURE Act will undoubtedly change the conversation you’re able to have with clients and that, in and of itself, is impactful.

ABOUT VESTWELL

Vestwell is a digital platform that makes it easier to offer and administer retirement plans. Vestwell removes traditional friction points through flexible investment strategies, fiduciary oversight, and streamlined administration, all at competitive pricing. By acting as a single point of contact, Vestwell has modernized the retirement offering while keeping the advisor’s, employer’s, and plan participant’s best interests in mind. Learn more at Vestwell.com and on Twitter @Vestwell.

Putting Retirement Plans in the Spotlight: What the SECURE Act Can Mean for Plan Sponsors

While there’s been no shortage of things to read about in the news these days, the bipartisan-supported Setting Every Community Up for Retirement Enhancement (SECURE) Act has been signed into law and it’s arguably the most impactful retirement plan security legislation in decades. For those wondering which of the hundreds of pages of legislation are most relevant to plan sponsors, here are some thoughts.

2019 Plan Retirement Survey

How Better Understanding Employee Perceptions of 401(k)s Can Lead Sponsors to More Effective Plan Delivery & Design

Did you know:

  • 76% of employees said they understand their plan at least somewhat well, while only 46% of sponsors believe the majority of their employees understand how a retirement plan works.

  • What participants do know is that they need to be saving more. Of those who are putting money away, only 36% are saving over 6%, while 64% think they should be.

  • 86% of employers feel obligated to help educate employees on saving for retirement, but less than 10% of employees view their employer as their “go-to” person for financial advice.

Read more in Vestwell’s newest report which gauges how employees are thinking about their retirement plans and what plan sponsors can do to increase engagement.

Download Report

#WinnersOfWealthTech Ep 28: Aaron Schumm, Founder and CEO of Vestwell

This month’s Winners of Wealthtech interview is with Aaron Schumm, the Founder and CEO of Vestwell, an entirely new kind of digital retirement platform transforming the way plans are offered and administered — for the benefit of advisors, employers, and employees alike.

Prior to founding Vestwell, Aaron was a co-founder of FolioDynamix, a wealth management and advisory services company that powered $800 billion in assets for over 100,000 advisors. At FolioDynamix, which was sold to Envestnet in 2017, Aaron oversaw the strategy, revenue, marketing, customers and product. Aaron holds a B.S. degree in finance from the University of Illinois and an M.B.A. degree from Duke University, The Fuqua School of Business. He was named as one of 40-under-40 by InvestmentNews and WealthManagement.com’s “10 to Watch”.

Listen to the podcast here!

 

How Can I Offer My Employees a 401(k) Plan?

By Denise Power

If you could create your own fantasy Board of Directors who would be on it? CO— connects you with thought leaders from across the business spectrum and asks them to help solve your biggest business challenges. In this edition, a CO— reader asks whether it is feasible for a small business to sponsor a 401(k) plan for employees.

Ben Thomason, executive vice president of revenue at Vestwell, answers…

Companies know it’s vitally important to have the right people on board to build the business, and a solid benefits package attracts the top talent they need. However, many small businesses assume they do not have the option to offer a 401(k) retirement savings plan.

Learn More