401(k) Specialist Issue 1 - 2023 - 38

401(k) INVESTMENT INSIGHT
cles. A focus must be placed on how all products
make their money, what they charge,
and what the real cost is for investors. The
industry reverts if it believes offering proprietary
products with hidden fees (to make up
for margins lost during this fee-compression
cycle) is the answer. How does recommending
100% proprietary solutions that show zero
costs to their investors help participants, plan
sponsors and consultants?
The industry spent years trying to get away
from proprietary fund lineups with embedded
sub-ta and 12b-1 fees that investors didn't
understand. There was at least some disclosure
about 12b-1 fees in mutual funds. Fixed annuities
operate implicitly in a world of fees, which
investors and plan sponsors mistake for free
solutions. The net-yield margins on the insurer's
general accounts are many times higher than
the " high-cost " mutual funds were vilified for.
Advisor Capacity
While many challenges exist, the one rarely
mentioned is the strain on consultants and
advisors caused by this new trend. Since fee
compression, these professionals have had to
do more work, offer more services, and face
more competition. Essentially doing more for
less money.
In a world of new solutions, professionals
are now expected to be experts and evaluate
the marketplace. Professionals are not
all created equal. Some have made this a
priority and are self-educating themselves.
Yet, many exceptional advisors simply don't
have the resources and unfortunately, the
interest to do so.
This leads to advisors being drawn to solutions
advertising zero fees. That path is understandably
attractive to them, as opposed to
trying to swim upstream. If advisors are not
confident in their relationship with a client,
they'll most likely avoid showing a solution
that fully discloses their fees and looks more
expensive, despite knowing those that disclose
are very likely less expensive than those
claiming a zero-fee structure.
A rapidly changing industry faces these dilemmas
often. Are you willing to lose a client
over showing them fully transparent solutions
or use solutions that tout no costs in order to
face less scrutiny?
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ISSUE 1 2023 | 401kSpecialist.com
It is truly an honor to work with some of the
best advisors on this topic, many of whom
are competitors. The fact is that the level of
knowledge in this space has grown immensely
in the last two years.
Our organization believes there are better
options: products that clearly disclose fees,
products that are multi-managed, multi-insured
and portable among recordkeepers,
as well as ones that offer fiduciary protection
during investment selection. But to a
part-time retirement plan consultant or an
undiscerning advisor, products like these can
" appear " more expensive.
" Are you willing to
lose a client over
showing them fully
transparent solutions
or use solutions
that tout no costs
in order to face less
scrutiny? "
As a result, we embraced this space starting
in 2015. We believed the industry would
head this way long before SECURE Act 1.0.
For over 20 years, our firm has conducted
extensive meetings with plan participants.
We acknowledge that they want guaranteed
income solutions that are simple, easy and
most importantly flexible.
Fixed annuity and immediate annuity
products, meanwhile, are irrevocable as
soon as the income starts. Imagine asking
participants today, many of whom still do
not understand target date funds, to make an
irrevocable decision the day they retire. What
will happen when millions of participants
realize that they cannot access their money
after their annuity payments begin?
Therefore, our approach has been to establish
a set of very simple principles:
1. The product must be easy for the participant
to understand
2. It cannot invest 100% of the money into
one product manufacturers funds (i.e. no
proprietary solutions allowed)
3. It must allow participants full access to
their funds at all times with no surrender
charges
4. We require it to be multi-insured (are
you prepared to risk every dollar of every
investor with one company?)
5. It must allow them to fully participate in
the market upside (no other path that we
are aware of will protect from longevity
risk other than outpacing inflation)
6. It must provide at very least a minimum
guaranteed income that is higher than
industry accepted recommended withdrawal
rates of 3.8% to 4.5%
These principles lead us to prefer Guaranteed
Minimum Income Benefit (GMIB) and
Guaranteed Lifetime Withdrawal Benefit
(GLWB) solutions of which there are various
offerings in the marketplace today.
Impact of Economic Downturn
The current economic downturn only
emphasizes the need for guaranteed income.
Industry withdrawal standards typically show,
at the high end, no more than 4.5% of their
savings in any given year. Therefore, we look
for solutions that offer that or higher.
These solutions typically will provide a
strong minimum income if the markets face the
challenges they do today and a considerable
upside if the markets happen to perform well.
Generational Reckoning
A whole generation is currently approaching
retirement without the pension benefits
enjoyed by previous generations. Many
face the prospect of retiring with the lack of
knowledge to make their money last. With
this burden shifted to retirees, above all, we
must provide education-to these retirees
and equally to plan sponsors.
The vast majority of plan participants and
sponsors say yes when asked if they want
products that provide guaranteed income in
retirement.
Regardless of how we solve this, the tidal
wave of retirees coming to decision time presents
a major industry challenge. A shortfall of
knowledge with millions retiring and missing
the opportunity to have a viable guaranteed
solution at retirement is going to be tragic for
too many.
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401(k) Specialist Issue 1 - 2023

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