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The Evolving Role of Retirement Plan Advisors

Taking advantage of these five trends will require new levels of expertise.

Dan Brun also contributed to this article.

This article originally appeared in the fall 2019 issue of Morningstar Magazine. To learn more about Morningstar Magazine, please visit our corporate website.

We wrapped up the 2019 Morningstar Investment Conference in Chicago a few months ago, and while the conference always has had a number of retirement-related sessions, this year the focus was clearly on what it takes for advisors to work effectively with defined-contribution plans. We like this topic and hope to see more content along these lines at the conference in the future. Here are five trends we took away from this year's event.

Increased Specialization Advisors who focus on defined-contribution plans are becoming specialists. While some advisors maintain a handful of plans to keep relationships with business owners, we think we'll see less of this in the future. Providing high-quality service to plan sponsors requires a level of expertise that is difficult to obtain if retirement plans are a small portion of an advisor's book of business. Plan sponsors will seek out advisors with deep experience in the space to help them navigate the complexities of plan selection and monitoring. Virtually all the following points are related to this.

The Shift to Fiduciary Governance Within the retirement space, advisors are increasing the scope of their services. In addition to moving into participant services, advisors are also expanding the services they offer plan sponsors. They are moving away from only providing investment guidance to also providing fiduciary governance. This might seem like a small difference, but it's actually a significant shift. Fiduciary governance allows plan sponsors to outsource the administration of their defined-contribution plan to an advisor--something many plans find appealing. We are glad to see this happen. We believe that holistic plan management results in better retirement plans, which in turn leads to better outcomes for investors.

Here Comes Financial Wellness While helping participants understand how much to save for retirement and how to invest likely will always be a fundamental component of retirement-plan advice, a new area is developing around "wellness"--both among plan sponsors and retirement-plan advisors. The term wellness is relatively ambiguous but generally applies to improving fundamental financial decisions. For example, an employee might not feel he or she can contribute to a 401(k) plan because of student debt or other financial constraints. Wellness tools address such challenges.

While some could argue that financial advisors have always been wellness coaches, few advisors have the time to work individually with each 401(k) participant. Advisors who get acquainted with the financial wellness tools available, how much they cost, and how they can help participants make better decisions may find that these tools improve plan outcomes, as well as free up their time to focus on other aspects of their practices.

Declining (and Shifting) Fees Fees are declining, and fee arrangements are shifting. Fees in the defined-contribution space generally are much lower than levels for wealth-management clients with similar assets under management. This is counterintuitive to some extent, because plan sponsors require a high degree of service, and the fiduciary duty required of a retirement-plan advisor takes extra time and effort. For retirement-plan advisors, lower fees require better technology solutions to manage clients at scale.

Meanwhile, advisors are moving toward flat-fee pricing based on the level of service and time required by the plan. While asset-based fees are still the predominant method of compensation, especially in the smaller plan space, we expect flat-fee pricing to continue to gain traction. Advisors can add considerable value to the defined-contribution space, and we want to see more plan sponsors use them; therefore, we support anything that decreases the barriers. We think that more transparency and disclosure of revenue would pave the way.

Technology to Scale Technology is the lifeblood of financial services. Good technology allows advisors to operate more efficiently and enter new markets. Historically, technology has helped advisors with practice management and to trade more efficiently, but today, technology is also being used to automate participant services and provide advice. Technology allows advisors to focus on individuals with smaller account balances while increasing the touchpoints and services for all investors. In other words, technology allows advisors to scale their business.

Parting Thoughts The role of the defined-contribution advisor has been evolving over the past decade, and we expect the pace of change to accelerate. Investments in technology, service, and scale can help advisors compete more efficiently while also offering better services to plan sponsors and participants.

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About the Author

David Blanchett

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David M. Blanchett, Ph.D., CFA, CFP®, is head of retirement research for Morningstar’s Investment Management group. In this role, he works to enhance the group’s consulting and investment services. He conducts research primarily in the areas of financial and tax planning, annuities, and retirement plans. Blanchett also serves as the chairman of the Advice Methodologies subcommittee, which is the group responsible for developing and maintaining all methodologies relating to wealth forecasting, general financial planning, automated investment selection, and portfolio assignment for Investment Management. Before joining Morningstar in 2011, he was director of consulting and investment research for Unified Trust Company’s retirement plan consulting group.

Blanchett’s research has been published in a variety of academic and industry journals, such as Financial Analysts Journal, Journal of Financial Planning, The Journal of Portfolio Management, Journal of Retirement, and The Journal of Wealth Management. He has also been featured in a variety of media outlets and publications, including InvestmentNews, MarketWatch, Money, The New York Times, PLANSPONSOR, and The Wall Street Journal. His research has won a number of awards, most recently the Journal of Financial Planning’s 2014 and 2015 Montgomery-Warschauer Awards, the Financial Analysts Journal 2015 Graham & Dodd Scroll Award, and the CFP Board Center for Financial Planning 2017 Academic Research Colloquium Best Investments Paper Award.

In 2014, InvestmentNews included him in their inaugural 40 under 40 list as a “visionary” for the financial planning industry, and in 2014, Money named him one of the brightest minds in retirement planning. He is a RetireMentor for MarketWatch and an expert retirement panelist for The Wall Street Journal. Blanchett is also on the executive committee for the Defined Contribution Institutional Investment Association (DCIIA) and serves on the editorial boards of Morningstar Magazine and the Journal of Retirement.

Blanchett holds a bachelor’s degree in finance and economics from the University of Kentucky, a master’s degree in financial services from The American College, a master’s degree in business administration from the University of Chicago Booth School of Business, and a doctorate in personal financial planning from Texas Tech University. Blanchett holds the Chartered Financial Analyst®, Certified Financial Planner™, Chartered Life Underwriter (CLU®), Chartered Financial Consultant (ChFC), and Accredited Investment Fiduciary Analyst™ designations.

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