A Retirement Consultant on Performance, Process, and Reenrollment
By T. Henry Yoshida
Henry Yoshida, a retirement consultant in the Southwest, works with mid-size plans up to $500 million in assets. He told DCfocus that he believes his clients face many of the same issues as large and mega-DC plans, but they often don't have the resources to resolve them in-house. As a consultant, he believes it is not his job to tell plan sponsors what they want to hear, but to move the conversation to what's really important in evaluating investment options and to overcome resistance to steps like reenrollment.
Fortunately, he believes that the plans he works with tend to be a bit more nimble than their mega-institutional cousins, and recently has had two major clients follow his recommendation to conduct reenrollment. Here are some highlights from our chat with Henry Yoshida:
Does performance still dominate investment selection?
"As an industry, we have a tendency to look at performance numbers as opposed to the process behind them. It's the processes that are more indicative of future success. Performance is a backward-looking measure.
"Think about what performance would show to a foreign investor coming to the United States in 2007 to look at real estate. Recent returns would suggest that you should just load up on California residential real estate. But that's not what sophisticated investors would have done. They would look at projected growth rates, at where airports are going to be built, at the rates in which people shift out of urban centers and move into suburban areas. In other words, they're looking at everything other than the actual price of real estate at that exact moment in time.
"But in our industry, we tend to focus too much on past performance. So, DC asset flows went into funds that were more aggressively structured heading into 2007, and then went into funds that were more conservatively aligned after 2009. In other words, money followed performance."
How do you shift the conversation to the process instead of performance?
"It has to be approached gently. Consultants have to show plan sponsor committees that there are several factors to take into consideration when you are evaluating a DC plan design that have nothing to do with past performance: namely investment methodology process and overall strategy.
"You need to show them how a sophisticated investor would evaluate a product. Take, for example, a hypothetical hedge fund that's launching with zero assets and no history at all. The only thing a potential investor can look at is the hedge fund manager's intent, structure, and overall strategy. Plan sponsors need to look at the same things when considering any future investment.
"Fees are another interesting conversation we've had with clients over the last several years. There has been significant pressure to incorporate lower cost options into our DC plan investment line-ups. Although there may be benefits to having a lower cost index investment option, lower cost is not actually the point of what we are trying to achieve. My belief is that a lower cost index investment helps an investor achieve a tighter overall range of possible returns. A tighter range can result in a more predictable stream of potential growth going forward and, I think, the lowered volatility is where the benefit is for our plan sponsor clients."
Are these easy conversations to have, or is it difficult to shift the focus?
"I've actually found it to be somewhat easy because it's a fresh perspective. It's not the same conversation that plan sponsors have traditionally had about their DC plan in the past."
That's interesting. Are there reasons why plan sponsors are ready to hear a fresh perspective?
"It's probably a confluence of a many things. One reason is fee disclosure legislation. Plan sponsors have always worked to oversee DC plan investments prudently, but fee legislation created accountability with potential consequences. The fact that so many things are still being hashed out in legislation and the courts makes them very receptive to a fresh perspective, delivered by an outside, independent, and jointly accountable source.
"For example, take reenrollment. We're able to say, 'You brought us in to consult on your concerns with regards to retirement readiness and wage replacement ratios. We can objectively show that a full reenrollment is one way to address that specific concern on your part and positively impact the largest number of your participants. I can show you that this is a more proactive route that your participants are actually asking for — they just don't know how to directly ask for it.' Over the last several months, we've had significant success with clients accepting our recommendation to conduct a full plan reenrollment."
What about when prospects are not receptive to your recommendations?
"As an organization, The Maresh Yoshida 401k Group does not offer services on an a la carte basis. We require that our plan sponsor clients hire us as a fully retained consultant to work on all aspects of their DC plan design. As you can imagine, this is not a fit with every potential plan sponsor. However, if, after a full RFP process, the plan sponsor can clearly articulate the scope and circumstances under which we work and why it is not a fit with their organization, that's still a victory for us because it meant our message came across clearly. I believe that feedback that starts with 'hey, we just didn't get a good feeling from you guys' is not a good response and indicates that we did not do a good job of properly outlining our consulting process.
"In a recent example, an investment firm decided not to hire us. This organization's committee is full of investment experts, although an overwhelming majority of employees are in non-investment management-related functions. They wanted to maintain control over the investment selection and did not value the plan design suggestions that we made in the interview process. As a matter of fact, we felt that they overly weighted the selection or availability of investment options to the detriment of the overall organization. We removed ourselves from the engagement, but felt positive about the process because our methodology, message and beliefs were clearly understood."
How important is it for you to take a look at the whole plan and not just the investment options?
"You have to ask yourself whether or not you are a consultant that just wants the business or if you are a consultant that actually believes you were hired to fix problems. If you are there to fix problems, your role is to manage investment consulting, plan design consulting, fiduciary oversight, and provider management for your clients while being jointly accountable to produce positive results. Unless you take full responsibility, you are likely to, at best, let existing plan sponsor mistakes continue and, at worst, create additional new problems.
"If we're working on a full plan conversion, the easier route is to say, 'we'd like to have all of your existing plan documents and amendments. We're just going to go ahead and transfer all that information to make sure that the plan will function the way it did before.' But you are not actually changing the situation or improving the plan to today's standards. We can actually peg within three years when a plan was designed and initiated just by the provisions contained within the plan documents. We know, for example, that if a DC plan has a 25% employee deferral cap limit, it is probably a pre-2001 plan because that was the provision within the tax law at that time.
"Reenrollment and a focus on investment processes are part of our approach, but all these things are being hashed out in the legal system right now. At the end of the day, I don't know if reenrollment will be the end-all, be-all, ten years from now. Today, we try to use the data-driven best practices available and encourage all of our prospective and current clients to consider a full reenrollment. I think not enough people talk about these plan design features on the consulting side because if you're willing to talk about it, you have to be willing to lose the business. That's a difficult pill to swallow because there are always many more consultants willing to just take the business."