New fiduciary help for smaller employers
As the retirement industry races to comply with the Department of Labor’s fiduciary rules by April 10 of next year, a number of companies have rushed in to offer fiduciary help to those firms that don’t have the time or resources to manage increased regulatory scrutiny.
Mercer, a global consulting firm, recently launched Mercer Wise 401(k), a retirement savings solution that helps mitigate plan sponsors’ fiduciary risk while lowering participants’ costs. The program targets smaller plans — between $7.5 million and $150 million in assets — with options that typically were only available to mega plans in the past.
“If you think of the 401(k) landscape, we have seen increasing complexity, a lot of regulatory changes; we’ve seen a lot of litigation on the 401(k) plan side, particularly surrounding the reasonableness of fees and the transparency of fees,” says Liana Magner, a partner and U.S. DC Investment Leader for Mercer Investments. “From the plan sponsor perspective, we see companies that are doing more with limited resources.”
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Over the years, Mercer has provided delegated defined contribution solutions to retirement plans on the larger side of the marketplace, like customized strategic asset allocation advice with a multi-manager structure. The company also provides continuous portfolio oversight through a well-documented governance process.
For Mercer Wise 401(k), Mercer looked at what the mega plan market was doing and what options they had available to them that smaller plans did not, like non-mutual fund vehicles.
Many small plans were advised by a broker so their plans were placed in retail share classes with revenue sharing, so “the equitability of how fees are paid is not equitable. So what we are trying to do is bring the best of the large plan experience into the smaller plan market,” Magner says.
In the details
The goal is to get small plans into low cost index funds and cheaper institutional share classes.
Mercer is the named fiduciary under the Employee Retirement Income Security Act for the plan. It handles the Form 5500 preparations, compliance testing and overseeing the accuracy of plan records. It also oversees contributions, distributions and required notices, monitors eligibility determinations, approves plan transactions, resolves questions or complaints and oversees and manages the service providers, Magner says.
Mercer hired an independent record keeper to provide administrative services to the plan and Mercer serves as the 3(38) fiduciary over the investment options available in the plan.
“For those investment options in the plan, we designed a set menu for the smaller end of the market to offer within the 401(k) program,” says Magner. On the passive investment side, Mercer leverages its buying power to deliver low cost index funds. For the active core options in the plan, Mercer has created multi-manager funds in the major asset class categories so plan sponsors can have a comingled fund vehicle.
All of the fees are transparent and there is no revenue sharing.
The smaller plan market has had less transparency historically, according to Magner. With the fee disclosure rules that went into effect a couple of years ago, many plan sponsors have had to take a hard look at the fees their plan providers were charging.
Another fiduciary option that has taken off in the past couple of years is Riskalyze’s risk alignment platform that empowers advisers to both IRAs and 401(k)s to do a better job complying with the fiduciary rule and other retirement industry regulations.
AmeriLife, an independent distributor of annuity, life and health insurance products to the senior market, recently signed on with Riskalyze to help its 100,000 affiliated agents across the U.S. mitigate their fiduciary risk when it comes to advising clients on the different insurance products that are available.
“There’s been an awful lot about the impact of the fiduciary rule upon our business, starting off with the fact that we don’t feel index annuities should have been included in the first place,” says Nathan Hightower, president of AmeriLife in Clearwater, Fla. “Since they are, we and the rest of our peers have had to pivot our business plans to accommodate what is coming down the road.”
Hightower emphasizes that he believes AmeriLife’s producing agents and the market in general are already looking out for the best interest of their clients. He disagrees with the Department of Labor’s base assumption that because these agents get a commission from the sale that they aren’t acting in the best interest of those clients.
To deal with the fiduciary rules, AmeriLife began looking for “a process that we had comfort in, that gives the producer that went through the process in an organized way and utilized the tools that it would give you a result that would be compliant with the DOL rule or, in the alternative, would not allow a sale to be made that couldn’t be made in light of the best interest rule,” says Hightower.
AmeriLife has two distribution channels, one being the captive channel and the other being the brokerage distribution channel.
“We felt like technology was the way to come up with this process and that we needed to find a platform we could apply to the career and brokerage channel that would achieve the goals we were hoping to achieve, while at the same time not resulting in so much administrative overhead expense it would cripple the ability to stay in business,” he says.
The company evaluated a number of technology platforms but settled on Riskalyze because it was simple to use, straightforward in what it was trying to do, made sense and was not too esoteric. Riskalyze was also willing to assist the company in customizing its platform to make it amenable to the insurance-only producer population, Hightower said.
Recognizing a key asset
In using the system, agents would gather information about the client’s assets, demographics and risk profile and would then spit out what Riskalyze calls a Risk Number.
The Riskalyze platform provides a quantitative measurement of a client’s risk tolerance which then allows annuity producers to quickly, accurately, and collaboratively uncover and assign the most appropriate goal-specific risk level according to their client’s personal Risk Number. Acting in the best interest of the client, annuity producers can then present clients with a document that includes their risk tolerance information and provides options based on this analysis.
Riskalyze has been around since 2011 but started focusing on investment advisers in 2013, according to Michael McDaniel, co-founder and chief investment officer at Riskalyze in Auburn, Calif.
“What we have done is boiled down some sophisticated math and statistics into easy-to-understand analytics,” he says.
The company’s goal was to solve two major problems in investing: investor psychology and the complex nature of the investment world.
“We boiled all kinds of best interest statistics into the Risk Number and that helps us combat those two problems,” McDaniel says.
The platform helps advisers do their job more easily. It is an adviser’s job to understand what each investor is looking for. Advisers need to know the end customer, he adds.
“The reason we’re seeing the interest from the AmeriLifes of the world is because of the DOL. They’ve been doing what is in the best interest. We provide them the technology that proves it is in the best interest for their client,” he said.
Riskalyze offers its clients access to what it calls the compliance cloud. This system monitors every part of the client’s transaction with an agent, that way, if there is a question down the road about fiduciary duty, the company can pull up its records of the transaction to prove what steps were taken to make sure any purchases were made in the best interest of the client.
A numbers game
The system also helps supervisors who are tasked with monitoring 1,000 producers at a time.
The company also offers a plan solution that allows an adviser who advises on multiple plans to automate the process and document their best interest approach.
“It is very simple and easy to understand for the investor,” McDaniel says.
He points out that his company has been working to document best interest practices since 2013. It is just recently that it was made a requirement.
“The standards for registered investment advisers have not changed, but the expectation of documentation and proof of what they are doing just got escalated,” adds McDaniel.