Teeing Up Retirement Plan Opportunities | Lord Abbett
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Retirement Perspectives

Here are several ways to enhance prospects with plan sponsors and other fiduciaries.

This article has been prepared exclusively for use by registered investment advisors and broker dealers. It is not intended for, and should not be used with, plan sponsors, plan participants, or the public in written or oral form or for any other purpose.

As a long-time provider of a 401(k) plan-prospecting tool, we often receive questions about the best ideas for scouting retirement plans. Of course, there is no surefire way to win such business, but there are a number of approaches that can bring an advisor closer to a decision maker, plan sponsor, or fiduciary. Consider the following talking points:

Providing More Fiduciary “Shields”
In an increasingly litigious society, plan sponsors sometimes may be at loggerheads with their participants, so it’s better for them to have certain protective shields.

Think of all the lawsuits that have been filed against plan sponsors over the past few years—such as deposit timing, failure to transmit contributions, breach of fiduciary liability, fees—the list goes on and on. Now ask this question: Even though a plan sponsor is never fully clear of his/her fiduciary liability, wouldn’t it make sense to take as much precaution as possible?

For example, one best practice for a smaller plan sponsor is to submit plan participant withholdings in a timely manner—that is, within seven business days. Doing this could provide a fiduciary “safe harbor” from being sued for deposit-timing issues.

Another best practice for discussion is what the plans are doing to be “404(c) compliant.”1  The Department of Labor (DoL) provides a sample checklist that a plan sponsor should follow to satisfy 404(c) rules. So, if you’re prospecting plan sponsors who claim they are compliant, ask them what they are doing to achieve the proper results. If the plans aren’t compliant, ask why they haven’t considered the benefits afforded by 404(c).

Another example (discussed below) is the qualified default investment alternative (QDIA). A QDIA will provide a layer of protection from participants defaulted into that such account. Also, hiring a 3(21) or 3(38)2 co-fiduciary can reduce liability and protect the plan sponsor as it applies to construction of the investment menu.

Retirement plans lacking some of these shields can be found among public data. On the year-end 5500 report, for example, a plan’s intent to adhere to a 404(c) is indicated by pension code 2F, while the QDIA is pension code 2T. Locating plans that are missing these shields (among others) is a prospecting idea that resonates well. It also can help advisors show plan sponsors the value they can add to their plan.

Reviewing the Investment Menu
One of the most frequently discussed topics within retirement plans concerns the investment menu, or the list of options for participants to build their nest eggs. According to the Plan Sponsor Council of America (PSCA), the average menu has a total of 19 investment options. This includes different asset classes, such as large-, mid-, and small-cap funds, international, fixed-income, and asset-allocation/target-date options, among others.

Advisors should consider asking some of the following questions:

  • Does the plan have a current investment policy statement?
  • Have plan demographics changed over the past few years?
  • How often are the current investment options reviewed?
  • What is the criterion to place a fund on watch/remove and replace an option within the menu.

Although the concept of “set it and forget it” is the path of least resistance, programs such as certain investment lineup screening programs can provide an easy way to screen an overall investment menu, review underperformers, and help plan sponsors tee up potential modifications. Here are a couple of ideas about how to prospect within an investment menu:

Reviewing a Plan’s Target-Date Funds
For more senior investment professionals, it’s hard to recall the retirement plan landscape prior to the Pension Protection Act (PPA) of 2006—the era without target-date funds (for all intents and purposes). The PPA enabled retirement plans to offer a QDIA as a default option within retirement plan menus. Offering a QDIA (such as a target-date fund) as a default option would give the plan sponsor a layer of protection from being sued from a plan participant who neglected to choose his/her own investments.

Target-date funds have since evolved to include a number of different concepts. Lately, many plans have been adopting a best-of-breed strategy, allowing investment menu additions such as target-date funds based on a specific glide-path. For example (using hypothetical numbers), a multi-manager target-date fund might have anywhere from 10–40% in large-cap investment options, anywhere from 5–20% in mid caps, 1–10% in small caps, 5–20% in international exposure, with the rest being allocated to both government and corporate bonds. This presents a “best of breed” concept that a single-fund family target-date provider cannot offer, while also encouraging asset managers and financial advisors to compete for the “sleeve” of the target date, when they will offer the most value.

Which approach is correct? There is no simple answer. The prospecting opportunity lies within reviewing the types of target-date funds within the plan, if any. Is the specific target-date fund a “to-retirement” or “through-retirement” approach? Does the existing range of target dates fit the current demographics of the participant base? What are the allocation(s) to target-date funds? For example, does a 2040 fund with 60% allocated to equities suit the participant base, or would a higher exposure to equities be more appropriate?

Bulking Up a Thin Fixed-Income Menu
According to the PSCA’s analysis, a plan generally will have approximately two fixed-income investment options, one either a cash/stable value option and the other an intermediate-term/core bond option.

Have you ever seen a retirement plan without a core bond option? Unlikely. Looking ahead, there are two key challenges such fixed-income options will face: providing consistency of return (as my colleague Greg Schneider discussed in his article, “How Strong Is Your Core?”) and searching for yield in the current environment.

Given that participants are aging and that IRA rollovers might be scrutinized more in the future, the need for the fixed-income portion to evolve from two options is apparent. So be sure to review a plan’s investment menu in required disclosures for companies with more than 100 eligible employees. Also review the plan’s year-end audit that needs to be conducted, in addition to the 5500 report. The audit provides a deeper look at the plan, including listing the investment menu for the plan and where the dollars are allocated. Such detail can provide insight into how many fixed-income options a plan has (or doesn’t have).

While there is no right answer, best practices suggest that, at the least, a plan must have a minimum number of diversified options. Will money market funds/stable-value funds provide higher yields in the future? Maybe. Given the current yield-starved environment both domestically and globally, discussing the addition of other asset classes such as multi-sector or high yield might be a way to add value. For example, over the last 20 years, the high-yield asset class (as represented by the Credit Suisse High Yield Index) has provided 87% of the upside of the S&P 500® Index, while only providing 54% of the downside, according to Credit Suisse. This might be one approach, but remember: all plan investment decisions are the remit of the plan sponsor’s investment committee, so be sure to check its latest policy statement.

Many different approaches can be effective to garner retirement plan business. What it really comes down to, though, is two things: plan sponsor education and plan participant education. The question is: can an advisor effectively show value to both groups for the compensation they are to receive? Some of the ideas described above differ from the old ways of prospecting solely on fees, service, and better investments. Reviewing a plan’s 5500 report, showing the plan sponsor new ways to manage and service their plan, analyzing the investment menu, and knowing ways to provide guidance with new regulations is a good step toward gaining access to a retirement plan. 


Section 404(c) is part of ERISA law that permits employees to direct the investment of their own retirement accounts. Plan sponsors that indicate they are adhering to the 404(c) rules can potentially get a layer of liability protection.
2 A 3(21) investment fiduciary is a paid professional who provides investment recommendations to the plan sponsor/trustee. The plan sponsor/trustee retains ultimate decision-making authority for the investments and may accept or reject the recommendations. Both share the fiduciary responsibility. By properly appointing a monitoring an authorized 3(38) investment manager, a plan sponsor/trustee is relieved of all fiduciary responsibility for the investment decisions made by the investment professional. (Source: National Institute of Pension Administration website.)

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information provided is for general informational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The Form 5500, Annual Return/Report of Employee Benefit Plan, is the form used to file an employee benefit plan’s annual information return with the Department of Labor (“DOL”).  5500 reports have pension codes that are aligned to benefits. For example, pension code 2E represents a profit-sharing provision, 2J a 401(k) provision, and so on.

The Credit Suisse High Yield Index is an unmanaged, trader-priced index constructed to mirror the characteristics of the high-yield market. The index includes issues rated BB and below by S&P or Moody’s, with par amounts greater than $75 million.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies, including market, liquidity, currency, and political risks. Mid and small cap company stocks tend to be more volatile and may be less liquid than large cap company stocks. Mid and small cap companies typically experience higher risk of failure than large cap companies. Investments in value companies can continue to be undervalued for long periods of time and be more volatile than the stock market in general. These factors can adversely affect Fund performance. No investing strategy can overcome all market volatility or guarantee future results.

TARGET DATE FUNDS. Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date.  Target-date funds contain varying amounts of stocks and bonds. Over time, the value of these investments will fluctuate and can decrease in value, causing your investment in the target-date fund to lose value as well. Target-date funds, however, are typically designed to be diversified investments.

Diversification does not guarantee a profit or protect against loss in declining markets.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to ma king an investment decision.



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