Survey of the Retirement Landscape: Challenges and Opportunities for DC-Focused Advisor

Voya Investment Management (Voya IM) in December 2018 refreshed its online survey of retirement plan sponsors and financial advisors focused on the retirement plan market. The original survey in 2016 was conducted to better understand the product, service and support preferences of plan sponsors, as well as to identify unmet needs and emerging opportunities. The study surveyed advisors who support retirement plans, to provide insight into how sponsor and advisor perceptions align.

To get perspective on sponsor needs, the survey asked sponsors about the most important issues for the next two years, challenges they face and the kinds of services they want from advisors.

The 2018 survey updates those key findings and explores a few new areas. Two years on, we find that many of the headline concerns remain the same, though some of the underlying details have changed. Perceptions on a few key issues have evolved and several new issues have arisen, most notably an emerging concern for financial wellness.

The original report was organized by key findings. In this update, the information is organized by its relevance to helping advisors develop their practices. First it presents the leading challenges and opportunities identified in the survey, followed by important areas where advisor services need to align more with sponsor needs, then by areas of alignment. The report concludes with details of updates that complement the key findings. The 2018 survey included several new questions about financial wellness and special needs of caregivers; these findings are included as appropriate in the organizing scheme outlined above.

Certain exhibits distinguish plan sponsor segments by size of plan. The study divided sponsors into three segments: plans with $1 million to less than $5 million, plans with $5 million to less than $25 million and plans with more than $25 million. In other exhibits the study distinguishes between “heavy focus” advisors, whose practices emphasize plan sponsor clients, and “emerging” advisors, for whom plan sponsors represent a smaller proportion of business. Please see the Appendix for details on the definitions and methodologies of the study.

Survey objectives

• Identify the current service needs of plan sponsors
• Help advisors better align their offerings to client needs
• The survey can help advisors determine whether the services they provide are the ones that matter the most to clients, and whether clients appreciate what their advisors are doing for them
• The findings provide information that can assist financial advisors seeking to match their services to the priorities of their plan sponsor clients
• Outlook and Action Items section looks at unfolding opportunities and offers suggestions for advisors to take advantage of them

Retirement readiness — attitude convergence

The 2016 survey found that most advisors thought few plan participants were prepared for retirement, whereas most sponsors thought participants were at least somewhat prepared. The study noted this as a key challenge, for advisors to bridge the perception gap with sponsors. Two years on, those views appear to be converging (Figure 1). Today, fewer sponsors say that plan participants are prepared to retire; more advisors now agree than did two years ago. By contrast, the percentage of plan sponsors who say participants are poorly prepared to retire has risen, while the percentage of advisors who agree has declined.

Perhaps advisors who took up the challenge have been successful in convincing sponsors to be more concerned with the retirement readiness of their participants. Yet, challenges remain: the percentage of responders who indicated poor retirement readiness remains high, and has risen among plan sponsors. The good news for advisors is that plan sponsors now are likely to be more receptive to ideas for improving participants’ retirement readiness.

Figure 1. Sponsor and advisor views of participant retirement readiness are converging¹

Financial wellness connected to participant education

Plan sponsors’ attitudes toward education have evolved, and they now align more closely with advisors on the benefits of participant education. Many of the factors associated with retirement readiness, such as educating participants to think long term and make appropriate investment choices, are now seen as elements of a broader financial wellness program. This change may be related to the convergence of sponsor and advisor views on retirement readiness.

Advisors less concerned about DoL compliance

With the demise of the Department of Labor’s proposed fiduciary rule, advisors are less concerned about complying with DoL fiduciary standards. By contrast, sponsor concerns did not change over the two years since the first study. In any case, plan compliance remains a top concern for both advisors and sponsors.

Deployment of target date funds expands

Use of target date funds (TDFs) rose significantly among larger plans compared to 2016 (Figure 2). Across plan sizes, nearly six in ten sponsors include TDFs in their plans; roughly one-third of those that do not include them would prefer to use TDFs in the future — this figure is up from less than one-fourth in 2016. While eight in ten plan advisors still say they use TDFs in most or all plans they serve, heavy focus advisors are much more likely than emerging advisors to use TDFs in all the plans they serve.

Figure 2. Plan sponsor use of TDFs has expanded since 2016

Emerging concerns: financial wellness, special needs, cybersecurity

Advisors say they commonly offer financial wellness programs to plans, although plan sponsors say adoption of most program types remains modest. Both sponsors and advisors say the cost of wellness programs is an issue though not the only one: other challenges such as complexity and measuring effectiveness also limit the adoption of financial wellness programs. Sponsors may not be thinking about the potential business benefits of such programs: a more focused and productive workforce; greater employee engagement and lower absenteeism and turnover. Standards of financial wellness are evolving and may become more important to plans; see Action Items, below.

Advisors are twice as likely as plan sponsors to consider help for caregivers of people with special needs as highly important: more than half of sponsors suggest it is less important or not important, whereas only three in ten advisors agree. Advisors are more likely than sponsors to view a higher percentage of participants as caregivers. Small plans are more likely to estimate fewer than 5% of participants as caregivers or consider it important to focus on financial needs of these employees. Emerging advisors are more likely to estimate greater than 5% of employees are caregivers and see this area of support as important over the next two years.

In reality, the number of affected people is about 15–20%, suggesting special needs caregiving will become a greater concern in the future. According to the U.S. Census Bureau, one in five workers has a disability or will have one in his or her lifetime,² and one in six serves as a caregiver.³ Caregivers generally do not feel confident about their financial wellness. Of those who care for an adult with a disability, 90% say they receive little or no financial support (Figure 3).⁴

Figure 3. Advisers can add value to special needs planning

Cybersecurity is another emerging issue that did not rank among the top concerns of sponsors but potentially will become more salient as cyberattacks on industry proliferate. Retirement plan data generally combine identifiable personal information with asset data, making these data attractive targets for identity thieves and other criminals. Last year, the ERISA Advisory Council asked the Department of Labor to provide guidance to plan sponsors on evaluating their cybersecurity risks. The DoL also was asked to establish requirements for sponsors to become familiar with data security frameworks and to develop cybersecurity processes for their retirement plans. It is not yet clear whether protecting participant data from cyberattack will constitute a fiduciary duty, though a prudent approach might be to treat it as such.5 For advisors, this represents an opportunity to proactively address a rising concern and educate plan sponsors (see Action Items section).

Current service offerings

Sponsors and advisors generally agree on the kinds of plan support offered, though sponsors seem less likely to recognize the services provided by advisors. Figure 4, which is sorted by percent of sponsor recognition, illustrates the discrepancies. This misperception also is likely to manifest in confusion among sponsors about what they are paying their advisor to do, and points to a need for advisors to more effectively communicate about the services they actually provide to sponsors.

Large plan sponsors are more likely to recognize their advisors provide support for investment selection and plan fiduciary responsibilities, but less likely to recognize support for financial wellness. By contrast, small- and mid-size plan sponsors are more likely to say their advisors support financial wellness, but perceive less help with selecting plan servicers.

Figure 4. More advisors say they provide services than sponsors recognize⁶

Consistent sponsor preferences

Advisors generally believe that plan sponsors need help understanding fiduciary responsibilities, are overwhelmed by compliance burdens, demand more services and expertise from advisors and have a growing need for support.

Sponsors are less likely than advisors think to say they need support with these issues, though there have been minor changes in their views since 2016. Figure 5 illustrates the percentage-point changes among key metrics in 2018 compared to 2016. (Metrics are shown from highest to lowest importance in the 2018 survey.) For example, in 2016, 91% of sponsors said they prefer to work with an advisor who specializes in retirement plans; in 2018, that figure increased to 94%. Over the same period, demand for “more service/expertise from advisor” rose from 55% to 63%.

Certain concerns have abated since the last survey: sponsors are less interested in understanding fiduciary responsibilities, and less focused on re-enrollment and participant outcomes. The latter two responses may be sensitive to perceptions of financial market performance, and could have been affected by strong market returns in 2018, at least before December. Depending on how the markets fare over the next two years, we might see greater variation in these responses on the 2020 survey.

Large plans are more likely to agree they need help understanding their fiduciary role and have a growing need for advisor support.

Figure 5. Sponsor attitudes show only slight shifts since last survey⁷

Services sponsors want but don’t have

Almost 30% of plan sponsors say they are satisfied and don’t want any additional services, but more than 70% still say they do. At the time of the 2016 survey, small plans said they did not want additional support more often than midsize or large plans. In the 2018 survey that finding was partially reversed: small and midsize plans now are more likely than larger plans to say they want additional support.

Since the 2016 survey, sponsor priorities have shifted in terms of services they are not receiving but would like to receive (Figure 6). Investment selection and monitoring now top the list of desired services, followed by a new entry — working with participants on financial planning and other forms of financial wellness — and then participant education and communication, which used to be number one. The larger the plan, the more sponsors want these services.

Figure 6. The services sponsors want and their priorities have changed since the first survey⁸

In addition to financial wellness, another new category entered the list in 2018 but didn’t rank as highly: guidance on other types of retirement plans; e.g., deferred, non-qualified plans and defined benefit plans. Other priorities also shifted: sponsors no longer seem so concerned with plan design, as they may have assigned the addition of auto enrollment as a key piece of the plan design equation, or fiduciary services; choosing a QDIA ranked low in 2016 and fell even further in 2018 — perhaps because most plans now have an established QDIA.

What sponsors value most in their advisors

Sponsors say they most value advisor support for investment, communication and fiduciary issues. They also say they value support for participant financial wellness, a new category first included in the 2018 survey (Figure 7). They also value more help with choosing and managing record keepers and other service providers. In addition, two emerging priorities showed up in responses: sponsors value advisor support for participant financial wellness and advice on other plan types, such as deferred, non-qualified and defined benefit plans. Consistent with responses to other questions, fewer respondents value advisor help with choosing a QDIA.

Figure 7. Sponsors tend to value plan support most highly⁹

Compliance and fiduciary responsibility

Advisors believe they are effective in controlling plan costs and that fee disclosures are easy to understand. Sponsors may not understand plan compensation as clearly as advisors believe they do. Sponsors tend to focus on absolute cost, which suggests they may be missing the point of Department of Labor (DoL) guidance on seeking value for the fees they pay.

Investment fiduciary role still misunderstood

Sponsor and advisor perceptions continue to differ as to whether the advisor serves the plan in an investment fiduciary role (Figure 8).

Figure 8. Discrepant views of advisor investment fiduciary role¹⁰

Plan sponsors and advisors differ in perceptions of the advisor’s role as an investment fiduciary. Four in ten plan sponsors believe advisors are not functioning as an investment fiduciary. More than eight of ten advisors indicate they usually or sometimes act as an investment fiduciary, while only one in two plan sponsors recognize that advisors act in this capacity. Sponsors may not understand clearly what it means to be an investment fiduciary; this misperception represents both a challenge and an opportunity for advisors to add value by educating their clients.

Discussion of plan features with sponsors

In 2016, advisors were far more likely to indicate they always or usually discuss features with plan sponsors, whereas sponsors were less likely to acknowledge such discussions. We found consistent results in 2018, but also found newer concerns (Figure 9).

Figure 9. Sponsors’ recollection of plan features discussed with advisors¹¹

Figure 9 shows that emerging issues are gaining importance with sponsors. Sponsors recalled discussions about financial wellness, healthcare spending accounts and non-qualified deferred compensation plans, suggesting that they are looking to advisors for a broader spectrum of advice than in the past.

Priorities for the next two years

Top priorities for the next two years have not changed since the 2016 survey: sponsors and advisors continue to agree that compliance with regulations remains the pre-eminent concern. The second key challenge sponsors cite is reducing plan fees and expenses. The third-ranked concern remains ensuring plan participants are appropriately invested. Taking fourth and fifth place, respectively, are increasing plan participation and helping participants transition into retirement.

Figure 10. Sponsor priorities remain consistent but include rising issues¹²

An emerging concern, helping participants with financial wellness, ranked among the top priorities for both sponsors and advisors. On all metrics, however, a higher percentage of advisors than sponsors says the issue is important. In some cases, the differences between sponsor and advisor priorities are dramatic; e.g., “increase plan participation,” pointing to ongoing challenges for advisors to educate their clients.

Out-of-sync perceptions

Advisors and plan sponsors share common perspectives on certain aspects of retirement plan support and delivery, such as participant challenges and the most effective forms of participant outreach. Where differences exist, however, advisors tend to have greater conviction than sponsors in their views on the effectiveness of support. These differences include:

• Advisor’s role as a fiduciary and acknowledgment of support offered beyond investment selection and monitoring
• Impact of the advisor in demonstrating value and other elements of plan pricing and fees
• Challenges/concerns for retirement plans going forward
• Factors/metrics associated with investment selection and monitoring
• Advisors generally rate the support they provide as very effective in influencing participant behaviors

Not surprisingly, some of these differences appear greater among small plan sponsors than among large plan sponsors. Larger retirement plans tend to take a more structured and sophisticated approach to management and engagement with participants than do smaller plans. This suggests that the levels of focus, resources, expertise, sophistication and regularity of sponsor engagement may account for the observed differences.

These differences point to business risks for advisors and raise crucial questions:

• How can advisors better communicate the value of their services?
• Can advisors educate sponsors to better understand their own interests?
• How should advisors focus on services that sponsors most value?

Sponsors most want advisors to help them with investment selection and monitoring, reducing fees and expenses and ensuring participants are appropriately invested. With the attention on fees and transparency, expect to get more questions from clients on how you’re adding value to their plans.

Evolving sponsor and advisor priorities

Without being prompted, sponsors and advisors offered different rankings of the most significant challenges they face. Though the numbers of responses were small, and therefore may not indicate trends, the table in Figure 11A suggests a potential evolution of sponsor attitudes since 2016. Sponsors’ concerns are arranged in descending order by frequency of citation, and thus ranking, in 2018. Sponsor priorities seem not to have shifted much. For example, increasing plan participation was a top concern in 2016 and remains so in 2018.

By contrast, “plan details” — short for “details related to the plan such as options, fees, match, investments, performance” — may have become more important than two years ago. Interestingly, cybersecurity, an emerging issue that scored relatively low in other areas of the survey, made it onto the unprompted challenges list as well.

Figure 11A. Sponsor concerns have evolved since the first survey¹³

Comparing advisor and sponsor concerns in the 2018 survey reveals several discrepancies that may be important to advisors in tuning their mix of services to sponsors. Again, though the sample sizes were small, Figure 11B suggests that advisors ranked increasing participation as their fourth priority, whereas it was first for sponsors. Advisors’ top priority in both 2016 and 2018 — fiduciary/ compliance issues — was ranked fourth by sponsors in 2018, suggesting there may be fewer opportunities to sell this service than advisors think.

Conversely, market volatility gets ranked fifth by sponsors but only tenth by advisors; this suggests there may be greater opportunity here to offer services than advisors may perceive. Sponsors and advisors agree on the importance of educating plan participants. Figure 11B contains more entries than Figure 11A, because advisors cited a greater number of concerns than sponsors; the additional concerns were mostly about issues that arose in managing client relationships.

Figure 11B. Advisor concerns also have evolved since the first survey¹⁴

Supporting participant decision-making

Advisor and sponsor perceptions of participant support are broadly consistent from 2016 to 2018, with the following key points still resonating:

• Advisors are more likely than sponsors to strongly agree that plans with too many choices can inhibit effective investment decisions, and that better metrics on participant goals can lead to improved outcomes
• The majority of sponsors and advisors agree that offering a tiered investment menu — target-date funds, core funds and a brokerage/mutual fund window — for different types of plan participants can result in better investing
• Plan sponsors and advisors share similar perspectives on key participant challenges such as getting participants to think long-term and persuading them to contribute more

Large plan sponsors are more likely to strongly agree with most sentiments, especially with the benefits of improved monitoring and benchmarking, and the value of digital tools in helping participants.

As in 2016, advisors consider their support to have a stronger influence on participant behavior than plan sponsors acknowledge. Sponsors and advisors still agree that the most effective methods of participant outreach are one-on-one, in-person meetings and group meetings, followed by digital support. Sponsors and advisors share similar views on the most important barriers to participant preparedness: advisors say the most critical issue is participants not contributing enough, and sponsors say the most important factor is participants not knowing how much money they will need at retirement.

Investment selection and monitoring

As noted above, sponsors chose investment selection and monitoring as their most desired service from advisers — in 2016 and again in 2018. The responses to most other investment questions also remained the same, but with a few meaningful changes:

• Most plan sponsors and advisors say sponsors have high or moderate involvement in the investment selection process. Among sponsors, a small percentage claims no involvement with investment selection, but all advisors say sponsors are involved — this contrasts with 2016, when advisors tended to rank sponsor involvement lower than sponsors themselves did
• Advisors still say performance is the primary factor driving changes to plan investment options, but for sponsors this factor has dropped from first to third place, behind availability of lower cost options and advisor recommendations
• Both sponsors and advisors continue to rely heavily upon performance measures to evaluate investment choices and less upon statistical gauges of risk-adjusted return or value added. Heavy focus advisors are more likely to assert that risk-return statistics are important to investment selection (see Call to action: Tap into the Power of Consistency). While key factors are similar across plan segments, smaller plans are less likely to note specialized measures have been discussed
• While relatively low for both groups, advisors remain more likely to assert the importance of analytic factors and metrics in selecting investments; significantly fewer plan sponsors indicate their advisors have recommended or discussed particular investment factors or metrics
• Nearly six in ten sponsors include target-date funds in plans, with use in large plans significantly higher and greater than in 2016. Annualized performance is the most important factor in selection of TDFs for plan sponsors, followed by advisor recommendations and broad asset-class diversification

Call to action: Tap into the Power of Consistency

Investment options used in plan menus must help participants confront the many uncertainties and volatility inherent in the market that can often prompt suboptimal actions. Voya’s Consistency Lens™ methodology can help. Although “past performance is not a guarantee of future results,” we believe a fund manager’s track record may offer important signals to identify which strategies may help clients best position their portfolios for a smoother ride along the retirement investing path. This proprietary methodology ranks funds on six returns-based factors that have proven to drive risk and return. This new way of evaluating investments can mean better retirement outcomes for clients and a differentiated way to enhance your value proposition.

Read Voya’s publication Applying a Consistency Lens™ to Fund Evaluations to learn more about the methodology and how you can put its power to work. The brochure is available on voyainvestments. com in the Practice Management section.

Obstacles to Expected Returns

As we analyzed the results of the 2018 survey, among the questions that emerged was one that seemed freighted with significant, forward-looking implications: why did investment selection become the top priority of plan sponsors?

Since we didn’t ask that question we can’t know for certain, but we can offer an intuitive hypothesis: the 2018 survey results came in during December, just as the market sell-off began. As sponsors watched their investment strategies stagger under high volatility, it might have made investment selection look more important in their eyes. To everyone’s relief, markets have recovered so far in 2019, but plan sponsors may still be thinking about volatility, and might be receptive to discussions of de-risking strategies.

Another key issue will be that many observers expect lower-than-average financial market returns over the next decade. These expectations will raise the need to review the appropriateness of plans’ long-term asset allocations, and may push sponsors to consider outcome-oriented investment solutions. Even more important, they will heighten the need for plan participants to increase savings rates, in order to meet their retirement goals. In turn, this will push sponsors and advisors to intensify their efforts to educate participants and modify their savings behavior.

Obstacles to Financial Wellness

Financial wellness does not yet occupy much bandwidth on plan sponsors’ concern spectrum, but is likely to become more important as greater numbers of participants near retirement age. Participants will need to be able to assess their level of financial security as they plan for retirement income and spending.

At present, plan sponsors do not seem fully to realize this need. The high rate of baby boomer retirements is now pressuring demand for investment solutions that potentially offer predictable sources of retirement income. And these demands are likely to intensify as the millennial generation approaches retirement age. The notion of financial wellness probably should encompass a greater focus on longevity-risk mitigation and retirement income solutions, especially if the financial markets deliver below-average returns in the future. There is an opportunity here for plan advisors to get ahead of a rising issue, and in the process, underscore the value they bring to client relationships.

Defining financial wellness

In a recent study reported in PLANSPONSOR, research firm Corporate Insight offered this working definition of financial wellness:

“… a manageable level of stress associated with current and future financial matters; a manageable level of debt…that can be paid off without financial penalty or significant stress on an individual’s financial situation or lifestyle; enough disposable income to maintain a desirable lifestyle that is within reason and an ample emergency savings fund that can sustain [that] lifestyle for a bare minimum of three months; and a financial acumen that will allow them to plan appropriately for future goals and respond to unforeseen financial obstacles.”¹⁵

Since about 46 percent of Americans do not have enough money to cover a $400 emergency expense,¹⁶ it seems likely that only a few can meet such a standard. This suggests a higher level of financial stress than implied by employment statistics, and points to pressing shortfalls that will need to be addressed.

• The 2018 survey findings tell us sponsors are looking to advisors for a broader spectrum of advice than in the past, and they want higher levels of expertise. Read Voya’s publication How to Differentiate Yourself as a DC Specialist for an overview of how advisors can articulate their value in the evolving DC Plan landscape, practical guidance for creating a value proposition and service agreement that address the spoken and unspoken needs of plan sponsors. The brochure is available on voyainvestments.com in the Practice Management section
• Expertise will be of particular importance in selecting and monitoring investments. In addition to average annual returns and fees, advisors will need a more rigorous methodology to gauge the suitability of investments for their clients’ situations. An effective way to evaluate plan investments is to familiarize yourself with Voya’s Consistency Lens™ methodology, which includes six factors that can help identify potential for consistent, repeatable results over time. Read Voya’s publication Applying a Consistency Lens™ to Fund Evaluations to learn more about the methodology and how you can put its power to work. The brochure is available on voyainvestments.com in the Practice Management section
• • A high and rising percentage of plan sponsors recognizes poor retirement readiness among participants. Sponsors get the challenges of increasing participation and educating participants, and likely will be receptive to ideas for improving retirement outcomes. They probably also recognize the importance of financial wellness, but may not understand the cost-benefit analysis of such programs. Use your next client meeting to introduce this rising issue — frame your educational presentation as a risk-reward assessment
• If 20 percent of the U.S. population is affected by a special need or disability, that figure likely includes plan participants. Helping employees better protect their families builds engagement and supports recruiting and retention — factors that should prompt sponsors to embrace special needs planning. A Voya study finds that 79 percent of caregivers think their employer could do more to help them.¹⁷ Read Voya Cares’ advisor practice management guide Making Special Needs Your Business. The brochure is available on Voyacares.com
• Security firms report that cyberattacks are becoming increasingly sophisticated and disruptive, involving denial of service, malware, ransomware and web application attacks. Familiarize yourself with cybersecurity issues and educate sponsors on the potential for this to become a plan fiduciary liability. Ask service providers about their cybersecurity policies to ensure your clients’ data are protected.

Let Voya help you

Voya is dedicated to meeting the unique requirements of DC-focused advisors. Our primary goal is to support your needs and those of your clients. We are committed to developing long-term partnerships and enhancing the effectiveness of your business. To learn more, contact your local Voya Investment Management representative or call (800) 334-3444 and ask to speak with a Voya DCIO specialist.

In December, 2018 Voya Investment Management (Voya IM) repeated an online survey of retirement plan sponsors and financial advisors focused on the retirement plan market to better understand product, service, and support preferences, as well as identify unmet needs and emerging opportunities. The original survey was conducted in April, 2016.

Brookmark Research (BM) and Practical Perspectives (PP) assisted Voya IM with the development, execution, and analysis of the plan sponsor and advisor surveys.

An Internet methodology was used to conduct the study, similar to 2016.

Plan sponsor and advisor surveys were very similar with only minor differences in the language used. Interviews took approximately 12.5 minutes to complete and were collected in December, 2018.

The 2018 plan sponsor findings include 307 plan sponsors, targeted as follows:

The 2018 advisor findings include 204 advisors, targeted as follows:

Similar to 2016, results shown for total plan sponsors were weighted to DoL plan counts provided by Voya, modified using ICI data to accommodate survey size categories ($1M to < $5M: (2016)74%/(2018)75%, $5M to < $25M: 21%/19%, $25M+: 5%/5%). Total advisor data were weighted to the natural distribution of advisor focus (heavy vs. emerging) as determined by survey screening (heavy focus: 27%/27%, emerging focus: 73%/73%).