In all sectors of the financial services industry, there is an almost maniacal quest for "alpha," or performing above the norm. Careers, fortunes and even companies are made or broken on their ability to deliver alpha.
The defined contribution industry is no exception. In the last two years, however, we have seen the emergence of a new alpha embodied by experienced defined contribution plan advisers.
In the DC market, alpha has been traditionally defined as a mutual fund's ability to beat its benchmark through superior securities selection. Five years ago, the focus shifted to superior asset allocation as target-date and risk-based funds began to dominate.
Today, that discussion is squarely focused on a plan adviser's ability to help participants be more successful in retirement - which equates to how much income will be replaced by the DC plan.
When recordkeepers offered only proprietary funds, the alpha responsibility was with them. As investment platforms opened up, DC investment-only firms were held more accountable.
With the emergence of the professional DC adviser, plan sponsors are beginning to realize that selecting the best adviser will have more impact than any other decision they can make.
The "Elite 5000" DC advisers (advisers with at least 10 plans, $30 million under management and three years of experience) are enjoying unprecedented success, but ultimately they will be judged on their ability to deliver alpha for the plan and its participants.
Grab a compass
Navigating the DC/401(k) market is tricky. The first hurdle is making the sale to the plan sponsor, who is the buyer but not the user. Plan sponsors are more than willing to try to help participants as long as they do not incur additional costs, work or liability - any one of which may cause the sponsor to balk.
The second hurdle is getting participants engaged in the process.
So what can an adviser do? Selecting the right provider partners is the first step. Both recordkeepers and DC investment-only firms have to be good and active partners in helping advisers to build, grow and manage their practices. With recordkeeper consolidation inevitable, advisers need to build strong relationships with those providers that have the assets and participants to maintain high levels of service by keeping and attracting the best people, make major investments in technology, and innovate.
Secondly, advisers have to understand - or partner with providers that understand - plan design to satisfy the needs of the plan sponsor while putting the greatest number of participants in a better position to succeed.
Next, investment selection through a combination of active and passive, asset allocation, glide paths or managed accounts according to the needs of the sponsor and its employees remains critical. But the last step is most important and difficult - engaging the reluctant participant.
Active engagement
Engaging participants, like investing, includes both active and passive strategies.
Passive strategies are embodied in the Pension Protection Act, inspired by behavioral finance, which includes auto-enrollment, deferral and investment selection. More can be done to use participant inertia and irrationality to guide them to do the right thing, with the greatest impact made by boosting deferral rates.
The DC/401(k) industry's ability to actively engage participants has been less than successful. We spend most of our time trying to teach participants a new lingo rather than speaking in their language. We need to engage participants in the media where they spend time, whether social media or smart phone apps, not in classroom-style education meetings.
Successful advisers will use passive behavior finance techniques to get participants into the plan at the right deferral levels using state-of-the-art managed accounts or asset allocation funds, and partnering with the right providers to engage participants where they live in a language they understand.
Barstein is the founder and executive director of The Retirement Advisor University at the UCLA Anderson School of Management Executive Education. Reach him at
