CAPTRUST Q4 2014 Institutional Strategic Research Report

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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, fi nancial advisors, and client-facing service associates as they look forward to 2015.

nine predictions for the new yearJohn D. CurrySenior Director, CAPTRUST Marketing

I recently emailed CAPTRUST’s senior leadership, fi nancial 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 fi rm believer in “less is more.” Four, fi ve, or maybe six (but hopefully not) main points would be perfect. I would characterize the prediction with a clever and pithy headline, defi ne it, expound a bit, and move on to the next thoughtful nugget. It was a perfect plan and, like a fi ve-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, fi ve 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?

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 fi nancial 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

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Below is a list of our predictions for 2015.

RETIREMENT READINESS GETS PRACTICAL1PARTICIPANT ADVICE TAKES OFF2HEALTHCARE MEETS RETIREMENT3SPONSORS LOOK TO DISCRETIONARY CONSULTING4FEE DISCLOSURE CONTINUES TO LEAVE ITS MARK5DEFINED BENEFIT PLANS DE-RISK6MARKET RATE PLANS PROVIDE PENSION ALTERNATIVE7INDUSTRY CONSOLIDATION CONTINUES8

9 WHAT ABOUT THE FIDUCIARY RULE?…OR TAX REFORM?

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

You can expect continued focus on well-established retirement readiness drivers in defi ned contribution plans such as Roth accounts, plan automation (especially auto-escalation 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. Off-the-shelf target date funds will be eyed more critically as assets continue to fl ow into them, leading many sponsors to consider multi-manager, passive, collective investment trust-based 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 fi nancial 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 income can I expect from my savings?

• How 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 fi rst — 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

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 effi ciencies. Human resource and fi nance 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 qualifi ed plans), implemented consulting, and outsourced CIO, will help stretched staffs keep up with legal and regulatory requirements, manage fi duciary committee processes, and handle day-to-day investment issues. This trend will cut across all plan types, including defi ned contribution, defi ned benefi t, and maybe even nonqualifi ed deferred compensation plans.

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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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5. FEE DISCLOSURE CONTINUES TO LEAVE ITS MARK

The DOL’s implementation of 408(b)(2) and 404(a)(5) put defi ned 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 fi ve 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 defi ned contribution plan fee debate, nonqualifi ed 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 defi ned contribution plans to their nonqualifi ed plans. They will seek to understand the underlying costs of recordkeeping and plan fi nancing. In some cases, they will be shocked at what they fi nd.

6. DEFINED BENEFIT PLANS DE-RISK

The combination of solid asset returns, rising Pension Benefi t Guaranty Corporation premiums, and the Society of Actuaries’ recently released mortality tables will motivate defi ned benefi t 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 benefi ts.

7. MARKET RATE PLANS PROVIDE PENSION ALTERNATIVE

The second part of the defi ned benefi t 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 defi ned contribution plans).

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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.

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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 redefi ning 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

The polarized atmosphere in

Washington, compounded by

the outcome of the recent mid-

term elections, suggests further

gridlock over the fi duciary rule.

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 fi duciary 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 fi duciary 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

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CAPTRUST GROWTH

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

Keaton Brewer joined CAPTRUST in 2014 as vice president, fi nancial advisor and is responsible for providing retirement plan advisory services to corporate fi duciaries. Prior to joining the fi rm, 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 fi nance with a minor in management from the University of Mississippi.

Wat Keys joined CAPTRUST in 2014 as vice president, fi nancial advisor and is responsible for providing retirement plan advisory services to corporate fi duciaries. Prior to joining the fi rm, Wat served as a fi nancial 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 Certifi ed Financial Planner (CFP®) and Chartered Retirement Plans Specialist (CRPS®).

RECOGNITION

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

INDUSTRY INVOLVEMENT

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 fi rms nationwide:

Category CAPTRUST Ranking

Defi ned Contribution Plans #2

401(k) Plans #2

403(b) Plans #3

457 Plans #2

Nonqualifi ed 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 fi rms nationwide, 2014.

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material in this publication may be reproduced

in any form without the express written

permission of CAPTRUST: 919.870.6822.

©2014 CAPTRUST Financial Advisors

The opinions expressed in this report are subject to change without notice. This material has

been prepared or is distributed solely for informational purposes and is not a solicitation

or an offer to buy any security or instrument or to participate in any trading strategy. The

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

data depicts historical performance and is not meant to predict future results. CAPTRUST

Financial Advisors, Member FINRA/SIPC.

GIVING BACK

We invite you to “Like” the CAPCommunity Foundation on Facebook.

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 aff ected 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.

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 eff orts from the very beginning.