CAPTRUST Q4 2014 Institutional Strategic Research Report

INSTITUTIONAL | Q4 14

Strategic research report nine predictions for the new year John D. Curry Senior Director, CAPTRUST Marketing

I recently emailed CAPTRUST’s senior leadership, financial advisors, and client service team for their thoughts and insights on near-future trends as I prepared to write this piece. I was certain the pearls of wisdom received from this group, cutting across all client and plan types, would crystalize into a short list of compelling predictions. My goal was to draft a tight little chestnut of an article that simply and accurately articulated where we believe the retirement industry is heading in the New Year.

I am a firm believer in “less is more.” Four, five, or maybe six (but hopefully not) main points would be perfect. I would characterize the prediction with a clever and pithy headline, define it, expound a bit, and move on to the next thoughtful nugget. It was a perfect plan and, like a five-year-old on Christmas Day, I eagerly awaited the reply to my plea for input.

Initially energized by the overwhelming response to my inquiry, I quickly realized I was in over my head as the emails continued to roll in and follow-up conversations ensued. I received dozens of emails, each offering, on average, five predictions. While there certainly was some consistency, I was surprised by the range of disparate topics. How can this be? Is it really that chaotic out there? What happened to my chestnut?

Transitional Issue

In this special December issue of the Strategic Research Report, CAPTRUST Senior Director John Curry outlines our predictions for plan sponsors, participants, and the retirement industry in general in the New Year. These predictions contain the accumulated insights of our business line leaders, financial advisors, and client-facing service associates as they look forward to 2015.

To help distill the many inputs into several manageable themes — while seeking to retain the valuable texture and nuance provided by the many other contributors — I enlisted the help of CAPTRUST Practice Leaders Grant Verhaeghe, Jason Stephens, and Scott Matheson. What follows is the result of that conversation.

1. RETIREMENT READINESS GETS PRACTICAL The issue of retirement readiness (or financial wellness, its younger and more comprehensive cousin) will remain top of mind in 2015. However, the concept will take shape in a more tangible and measurable way in the New Year. Rather than the vague-but-aspirational goal it is today, retirement readiness will become a guiding principle for many plan sponsors. In other words, as they evaluate their choices and actions, retirement committees will increasingly view them through the lens of improving participant retirement readiness. How does this fund, feature, or program help our employees save more, invest better, or retire more continued on page 3

Below is a list of our predictions for 2015.

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RETIREMENT READINESS GETS PRACTICAL

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PARTICIPANT ADVICE TAKES OFF

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HEALTHCARE MEETS RETIREMENT

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SPONSORS LOOK TO DISCRETIONARY CONSULTING

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FEE DISCLOSURE CONTINUES TO LEAVE ITS MARK

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DEFINED BENEFIT PLANS DE-RISK

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MARKET RATE PLANS PROVIDE PENSION ALTERNATIVE

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INDUSTRY CONSOLIDATION CONTINUES

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WHAT ABOUT THE FIDUCIARY RULE?…OR TAX REFORM?

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INSTITUTIONAL | Q4 14

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confidently? This perspective will inform how plan sponsors look at a range of issues and, in fact, is likely to reach beyond employer-sponsored retirement benefits.

You can expect continued focus on well-established retirement readiness drivers in defined contribution plans such as Roth accounts, plan automation (especially autoescalation as the next wave to follow), and outcome-oriented investment solutions such as risk-based and target date funds and models and managed account programs. Offthe-shelf target date funds will be eyed more critically as assets continue to flow into them, leading many sponsors to consider multi-manager, passive, collective investment trustbased solutions, or even custom asset allocation programs.

Finally, despite their inherent outcome focus and welcome recent clarity from the Department of Labor (DOL) on the use of in-plan annuities, these products will continue a slow march toward adoption.

2. PARTICIPANT ADVICE TAKES OFF Driven by a deeper retirement readiness focus, participants will increasingly demand advice. Rather than rely on generic educational programs and recordkeeper-delivered guidance, participants will look for true, personalized advice from an independent third party. They will look for an advice provider that can incorporate their entire financial picture (including outside retirement savings and spouse assets and savings) and answer key questions such as: • How

much do I need to save?

• How

should I invest my retirement savings?

• What • How

income can I expect from my savings?

will I know when I can afford to retire?

As this trend emerges, it will highlight inadequacies of pure technology-based advice solutions that have, to date, seen only modest uptake.

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3. HEALTHCARE MEETS RETIREMENT One recurring theme in the predictions received is the impending convergence of employee healthcare and retirement. Driven by plan sponsor and participant adoption of healthcare savings accounts, concerns about healthcare costs, one of the largest expenses a retiree will experience, and how to fund them move to the forefront. Participants will begin to demand help making the complex decision about whether to fund an HSA or a retirement account first — and with how much. Meanwhile, helpful technology providers and recordkeepers will emerge with tools and statements integrating these two important drivers of retirement readiness.

4. SPONSORS LOOK TO DISCRETIONARY CONSULTING

Driven by plan sponsor and participant adoption of healthcare savings accounts, concerns about healthcare costs, one of the largest expenses a retiree will experience, and how to fund them move to the forefront.

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Although the capital markets have more than recovered and the economy continues to improve, most companies have focused hiring on areas that drive revenue growth or operating efficiencies. Human resource and finance staffs have shrunk on a relative basis across most of our clients. With more work to be done, but the same number of people (or fewer) to do that work, many plan sponsors will look for ways to outsource non-core competencies, like the retirement plan management.

They will turn, in increasing numbers, to consultants providing discretionary consulting services.

These services, also known as 3(38) investment management (for qualified plans), implemented consulting, and outsourced CIO, will help stretched staffs keep up with legal and regulatory requirements, manage fiduciary committee processes, and handle day-to-day investment issues. This trend will cut across all plan types, including defined contribution, defined benefit, and maybe even nonqualified deferred compensation plans.

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5. FEE DISCLOSURE CONTINUES TO LEAVE ITS MARK The DOL’s implementation of 408(b)(2) and 404(a)(5) put defined contribution plan fees under a spotlight, but many plan sponsors still grapple with the implications of this knowledge. Are the fees they are paying reasonable for the services being rendered? What’s the best way to allocate plan fees to participants? This next generation of thorny questions will be much debated in retirement committee meetings in 2015.

The former question can be addressed, at least in part, through an ongoing process of provider fee benchmarking every three to five years. The latter is trickier; a variety of approaches to “fee leveling” or “fee fairness” exist.

However, execution of a plan sponsor’s preferred approach may — or may not — be feasible given the incumbent recordkeeper’s technology capabilities or the plan’s investment menu and share class selection.

As a byproduct of the defined contribution plan fee debate, nonqualified plans will catch “transparency fever.” Companies providing deferred compensation plans will begin to apply best practices gleaned from the past few years of

work on defined contribution plans to their nonqualified plans. They will seek to understand the underlying costs of recordkeeping and plan financing. In some cases, they will be shocked at what they find.

6. DEFINED BENEFIT PLANS DE-RISK The combination of solid asset returns, rising Pension Benefit Guaranty Corporation premiums, and the Society of Actuaries’ recently released mortality tables will motivate defined benefit plan sponsors to pursue pension de-risking strategies. In increasing numbers, they will offer lump-sum buyouts to retirees and terminated employees and transfer pension obligations to private insurance companies through group annuity purchases to pay out benefits.

7. MARKET RATE PLANS PROVIDE PENSION ALTERNATIVE The second part of the defined benefit story is the emergence of the market rate cash balance plan as a more sustainable approach to the pension plan and an important driver of retirement readiness. This trend will take root as professional services organizations convert existing cash balance plans to market rate plans and as paternalistic companies begin to seriously consider them (perhaps combined with attractive matches in their defined contribution plans).

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8. INDUSTRY CONSOLIDATION CONTINUES Retirement plan recordkeeper consolidation will continue, driven by the twin challenges of funding technology upgrades and the need to achieve operating scale. Many providers use customized versions of recordkeeping technologies that periodically require an overhaul at the cost of tens of millions of dollars. They are further tasked with differentiating themselves — or at least “keeping up with the Joneses” — by redefining their service models and developing new services, improved web-based tools, aggregators, education and mobile device capabilities, income projections, and managed account services. 2014’s notable merger activity raised the bar on what it means to be “at scale” as a recordkeeper and opens the door for additional activity in 2015.

On a related note, this consolidation trend will spur a more symbiotic

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relationship to emerge between providers and advisors. Top recordkeepers, increasingly dependent on advisors for distribution, will work more closely with top-tier consultants (or “elite advisors” as they are becoming known) to add value and jointly manage complexity for their shared clients.

9. WHAT ABOUT THE FIDUCIARY RULE?…OR TAX REFORM? While a list of 2015 predictions would be remiss if it did not mention a possible resolution to the longstanding debate over the pending fiduciary rule or comment on tax reform, our crystal ball is not so clear on these topics. The polarized atmosphere in Washington, compounded by the outcome of the recent midterm elections, suggests further gridlock over the fiduciary rule (although we are encouraged by attention the White House has directly paid to this issue). We further suspect that full-blown tax reform is unlikely in 2015, but acknowledge that retirement plans

The polarized atmosphere in Washington, compounded by the outcome of the recent midterm elections, suggests further gridlock over the fiduciary rule.

remain at risk as a quiet and politically tenable source of tax revenues — either through a reduction of contribution limits or mandated Roth contributions over a contribution threshold.

Of course, only time will tell what 2015 has in store for the retirement industry or if our predictions for the New Year will hold true. Right or wrong, we promise to keep you apprised of important and emerging developments as they unfold. In the meantime, please feel free to contact us for more information on these or any other topics on your mind.

INSTITUTIONAL | Q4 14

captrust news

CAPTRUST GROWTH As the year wraps up, we have continued to add more talent to our portfolio with the addition of two new financial advisors at our headquarters in Raleigh.

RECOGNITION We are pleased to share the results of PLANSPONSOR Magazine’s recently released 2014 annual consultant survey. CAPTRUST consistently earns top ranking among retirement plan consulting firms nationwide: Category

Wat Keys joined CAPTRUST in 2014 as vice president, financial advisor and is responsible for providing retirement plan advisory services to corporate fiduciaries.

Prior to joining the firm, Wat served as a financial advisor and retirement plan specialist with LPL Financial, and has worked in the industry since 1984. He earned a Bachelor of Arts degree in studio art from the University of North Carolina at Greensboro and holds the designations of Certified Financial Planner (CFP®) and Chartered Retirement Plans Specialist (CRPS®).

Keaton Brewer joined CAPTRUST in 2014 as vice president, financial advisor and is responsible for providing retirement plan advisory services to corporate fiduciaries. Prior to joining the firm, Keaton served as associate director of sales and trading at Brownstone Investment Group, and has worked in the industry since 2012. He received a Bachelor of Business Administration degree in managerial finance with a minor in management from the University of Mississippi.

CAPTRUST Ranking

Defined Contribution Plans

#2

401(k) Plans

#2

403(b) Plans

#3

457 Plans

#2

Nonqualified Plans

#2

Plans <$5 million

#2

Plans $5 million–$50 million

#5

Plans $50 million–$200 million

#4

CAPTRUST rankings as reported in PLANSPONSOR Magazine’s annual consultant survey of 34 retirement plan consulting firms nationwide, 2014.

INDUSTRY INVOLVEMENT November 2, 2014 | Washington, D.C. AFP Annual Conference Sponsor and Exhibitor: Dan DiGiacomo, Financial Advisor and Jim Strodel, Financial Advisor

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GIVING BACK SALVATION ARMY ANGEL TREE CHRISTMAS CHEER PROGRAM When we began participating in the Salvation Army’s Angel Tree program several years ago, we committed to adopting 40 angel children. It brings us great joy to share that every year, those numbers increase incrementally, and due to the overwhelming response from CAPTRUST employees, we always end up going back to ask for more. In 2014, CAPTRUST employees adopted 200 angels.

“I am deeply touched when my colleagues share stories with me about taking their own kids to shop for their adopted Angel Tree children’s gifts. It is the best way to teach them about children that are less fortunate than them, and hopefully provides them with some added perspective as they sit down to make their own Christmas wish lists,” says Financial Advisor, Kevin Monroe. Kevin has been heading up CAPTRUST’s Angel Tree efforts from the very beginning.

AFRICAN CHILDREN’S CHOIR The internationally acclaimed African Children’s Choir performed for CAPTRUST employees at the Raleigh, NC headquarters. The choir was established in 1984 during Uganda’s civil war by human rights activist Ray Barnett as a unique approach to assist the orphaned and starving children affected by the war. Today, children from Uganda and Kenya tour the world to raise awareness and support for 7,500 orphans in seven African nations. For more information, please visit www.africanchildrenschoir.com.

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information and statistics in this report are from sources believed to be reliable but are not warranted by CAPTRUST Financial Advisors to be accurate or complete. Performance

©2014 CAPTRUST Financial Advisors

data depicts historical performance and is not meant to predict future results. CAPTRUST Financial Advisors, Member FINRA/SIPC.

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