Many smaller US defined contribution (DC) plans rely on guidance from advisors, and the majority of these DC plan sponsors are happy they do so. But how do plans gauge whether they really need advisors, and assess the benefits against the cost of advice?
Our recent survey of plan sponsors found that 78% of DC plans with less than $50 million in assets use financial advisors and consultants (which I’ll refer to collectively as “advisors”). And most plan sponsors need that help, because they are senior leaders of their companies, and shepherding their DC plans is just one among their many priorities.
The plan sponsors who don’t use an advisor cited the expense of hiring advisors, the fact that their recordkeepers provide the same services, and concern that advisors put their own firms’ commercial interests ahead of plan sponsors’ needs.
It can be tough to determine if the advisor’s help is worth the cost, because most smaller plans lack the resources to establish best practice guidelines, and to comparison shop among providers. That’s why we compared the survey responses of plans that use advisors to the responses of those that don’t, to see whether there were material benefits to using advisors.
How Plan Sponsors Benefit from Advisors
In category after category, smaller-plan sponsors using an advisor were more confident than their advisorless peers¾about plan fees, communications, fiduciary responsibility, governance, operational procedures, and understanding the needs of their participants.
Of the respondents who use an advisor, for fully 75% the biggest benefit is help with investment reviews. The advisor helps answer questions such as: Do I have the right investment menu? Have I chosen the best funds in each category? Are the funds doing what they’re supposed to do?
Advisors also made sponsors more confident that they’ve provided enough participant communication—and that they’re getting the best value for fees. About 60% of respondents said they appreciate help with fiduciary and governance issues as well as with participant education and communication. And almost half look to advisors for help in reviewing fees—both for investments and for the plan.
Fiduciary Best Practices
Plan sponsors with an advisor are almost twice as likely to say their firm provides comprehensive training for all fiduciaries. They’re a lot more likely to have a documented process to ensure that plan decisions meet fiduciary standards, and to have a comprehensive investment policy statement.
As to the costs of the advice, 61% of plan sponsors with an advisor say the quality of the investment advice and guidance they receive is worth it.
We think it would be a good practice for DC plan sponsors to evaluate their advisor service periodically, just as they would assess the investment and other fees they incur.
Plan sponsors can use our survey results or their own research to benchmark and evaluate their advisor:
- Are you satisfied with the advisor’s investment expertise and help with investment reviews?
- Are you getting timely clarity on fiduciary and governance issues?
- Is the advisor’s assistance with reviewing plan and investment fees helpful to managing your plan’s costs?
And perhaps the most important assessment is whether the advisor is helping your DC plan continually improve at generating more successful retirement outcomes for participants.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Seth J. Masters is Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.