Requests for proposals are overtaking more informal referrals and industry networking as the most common way for retirement plan sponsors to select their advisers. But this increasing popularity is not universal — some plans on the East Coast still have not fully embraced RFPs, a new survey found.
And cost wasn’t the main driver for adviser selections, according to the Retirement Advisor Council. Instead, the sponsors said they chose advisers based on their responsiveness, courtesy, humility and patience, which mattered more than what they charge.
Fourteen employer plan sponsors from across the United States that use a plan advisers were queried in focus groups for the RAC study. The report, “What Type of Financial Advisor is Right for My Plan?”, was underwritten by four major U.S. retirement investment management firms.
The council’s report said half the sponsors selected their plan advisers primarily for the role the adviser was prepared to play in participant education, communication and counseling. Other business models important to the rest of those surveyed were: fiduciary support services, the adviser’s qualified default investment alternatives policy, its compensation mix and the firm’s business affiliations such as wealth management and health and welfare benefits services.
The report said that while “formal, deliberate Advisor search RFPs have become de rigueur among plan sponsors West of the Mississippi,” those in the East prefer “less time-consuming” ways of finding an adviser.
Preferences for Finalist Presentations
Regarding final presentations, plan committees prefer adviser candidates who are “brief and concise, with the most appealing style and investment approach,” the RAC study said. “[We were looking for] someone who could educate us without coming across [as] arrogant,” said one survey participant who works for the retirement plan of a privately held employer in Texas with 100-999 employees.
Plan committees seeking a new adviser differ in the level of involvement they expect in critical functions like participant education, scope of fiduciary services and QDIA choices. Some plans want an adviser to lead participant education and communication, while others simply want help with coordination of these services offered by the sponsor. Some require direct access to the adviser for participants so they can discuss investments and retirement savings goals.
As for adviser payment models, the survey asked about the “right mix” of the following: annual retainer paid by the sponsor, percentage of plan assets, flat dollar amount paid by participant and project fees. Although their specific answers on compensation mix were not included in the report, the sponsors did rank services by percentage of what they would pay advisers for them out of a theoretical $100. Periodic review of investment options with the adviser was valued highest, with having the adviser examine their plans to make sure they are administered according to applicable laws, regulations and stated policies ranked second. Third was getting assistance on implementation of the fiduciary process.
Four of the 14 plan sponsors interviewed reported having conducted an adviser search via RFP in the last two years. Six said they had conducted an adviser RFP search between two and five years ago.
The RAC report said the benefits of conducting a formal RFP search for a plan adviser include:
- the opportunity to align goals with the advisory services and business models available;
- fiduciary risk mitigation (the search demonstrates the application of a deliberate process);
- better understanding of fees for services;
- detection of trends;
- benchmarking information; and
- inherent process fairness.
An adviser search protocol and a customizable template can be accessed at www.retirementadvisor.us.
See ¶412 of The 401(k) Handbook for more information about selecting investment managers and other types of plan advisers.