Welcome to Season 2, Episode 23 of Meet the Expert® with Elliot Kallen!
In this episode, Elliot Kallen brings on Trey Banton, a regional Vice President at Transamerica, to discuss what makes a 401(k) plan great, key elements to look out for in the process, and what the best fiduciary advisor should be doing for you.
Meet Our Guest
Senior Regional Vice President, Transamerica
Trey Banton is a Senior Regional Vice President at Transamerica Retirement Solutions covering the Northern California region. With over 25 years of experience in the industry, Trey offers a high level of expertise in the 401(k) world and understands the value of maintaining strong relationships with clients, educating employees, and having a customized plan design to meet the needs of sponsors. Trey has been a key speaker at business seminars, and also holds extensive experience in sales and marketing. His areas of focus include business development strategies for company-sponsored retirement plans, plan design analysis, investment benchmarking and analyses, and employee education solutions.
What makes a great 401(k) plan?
Elliot Kallen: Our goal today is not the individual portfolio, but it’s in the 401(k) world or the business world. We’re very honored today to have Trey Banton, a regional VP of Transamerica.
He’s got 26 years of industry experience. He’s the retirement plan consultant with them. If you need a retirement plan and Transamerica is going to be involved – he’s your guy.
I’ve known Trey for most of that 20 years that he’s been with Transamerica, and I consider him a good friend. So welcome, Trey.
Trey Banton: Thank you very much for inviting me today. I appreciate it.
Elliot Kallen: We’re going to talk a little bit about 401(k). How that works, why it’s good, what does it mean, and things like that. Let’s start generally. What makes a 401(k) great?
Trey Banton: That’s a great question, and it depends on who you ask.
“It’s about plan sponsors having a good experience and a successful plan.”
Some plan sponsors are looking for cost-effective plans only. Give me the lowest cost, and I’ll be happy. Others want a diversified investment portfolio that has outside investments including self-directed brokerage accounts to be used as specialty funds. Some want to be more tax-efficient because they have a lot of tax burdens this year. Others are focused on their employees, and they want to make sure they can have the employees benefit in retirement the same way they benefit now. After 26 years, you realize it’s a combination of all those different things.
Why should clients care about who their fiduciary advisor is?
Elliot Kallen: We are fiduciary advisors, plan fiduciaries, 3(21) and 3(38) fiduciaries, lots of terms. That’s if we want to get into a swamp, but basically were fiduciaries. What does that mean to a client and why should they care?
Trey Banton: It sounds complicated, but it’s good to draw some numbers just so people know:
A 3(38) fiduciary selects and deselects the investment options for employees
A 3(21) fiduciary recommends the options that are available based on what your goals are
You’re guiding the plan design and customizing the plan to meet the needs of the plan sponsor. The plan sponsor is a plan fiduciary along with your firm.
“The idea is that the firm along with the plan sponsor will make sure the plan stays in compliance now and make sure it meets all the goals of the plan sponsor.”
In terms of looking at the investment side, there is making sure the plan meets all the 404(c) requirements while also making sure the plan is monitoring, selecting, and deselecting funds based on that goal on the IPS statement.
Lastly, looking at pricing is a key to making sure the plan has pricing that’s appropriate for where they are in the market space and staying competitive with their peer groups.
Elliot Kallen: I feel sometimes, Trey, like our job is to hold the Transamerica feet to the fire to make sure that you’re always on top of your game. That’s so the clients are getting the best deal out there and the best service.
Trey Banton: Without a doubt, and you’ve done that to me more than once or twice.
Elliot Kallen: Well, you know friendship is friendship and business is business. Our loyalty has always got to be to the client no matter what, and it is.
Trey Banton: That’s important for us to maintain clients. Typically in a plan, you’re looking at five to seven years to break even. What we’re trying to do is make sure we maintain those clients. If you’re giving us feedback about what needs to happen to make sure that our relationship stays strong, we are always going to listen to you.
What are the key elements of annual reviews with trustee administrators?
Elliot Kallen: We work with trustees and administrators. Sometimes the trustee is not the owner of the company or CFO. It could be the person in charge of the plan, the HR manager. It could also be the CFO or owner, but they are uninvolved with the plan by itself because it’s for employees, not them. They don’t need it, but they have to legally review it.
We’ve always recommended a once-a-year live meeting or Zoom, in the world we live in. You don’t want to miss that because there are changes that are good for me. Whether it be investments, auto-enrollment, or anything else. What are the key elements when we do these annual reviews with trustee administrators?
Trey Banton: When you’re looking at a plan review, we want to break it down.
To start, there is employee engagement.
Do your employees see, understand, and appreciate what you’re giving them? With this, it comes down to two different sides.
The first side is:
How is the separation disarray in your plan?
Are you participating at a level that makes sense?
If you are a plan sponsor and getting less than 70% participation, that typically means your employees do not understand what benefits they have and how to use those to their advantage.
The second side is:
A 10% average of deferral rates are needed to maintain your current standard of living
If rates are lower that’s fine, but it is necessary to educate employees on how to increase those contributions over time
Next, there is a plan design.
There have been law changes this last year like the SECURE Act and the CARES Act. There are things in both of those provisions that benefit the plan sponsor. Every year you want to say what has changed from a congressional point of view that could positively impact the planet itself and the plan sponsors. This isn’t just for adding employees, even though they tend to have the greatest contributions. It’s also for the rest of the employees, and how they benefit from this program as a whole.
Lastly, there is plan efficiency.
There’s a lot of investments in our plans, and how they are working is important. For example, are they outsourcing for auto loans, distributions, or auto increases? Dealing with communications, distributions, and things of that nature to make sure it is as efficient as possible for the plan sponsor? We don’t want them spending all their time managing these plans. We want to have it done for them.
How often should trustees administrators be shopping for new plans or trends?
Elliot Kallen: We know that there’s plan turnover in the industry as a problem. We thrive with plan turnover because we provide the best plan for the employees, participants, and the employer. We also get the best plan because it’s a competitive world out there. How often should trustees administrators be shopping trends, shopping Transamerica, or shopping for a similar company to make sure Transamerica is doing its job?
Trey Banton: The question comes down to what the industry standard is.
“The industry standard is benchmarking this plan every three years.”
I’m not saying you need to make a change. I’m not saying there’s anything wrong with the plan, but you want to be able to document that the plan was put out to bid.
“You can look at the plan, the provisions, the pricing features, and make sure that the plan sponsor has everything they need to make good decisions.”
You want to make sure the plan has documentation in case an auditor comes in and says, “What did you do, and can you prove it?” You’re going to come across plans that are five, ten, even 15 years old. Because there’s been so much downward pressure over the last five to six years, you see a lot of plans that are mis-priced. Not so much because they are mis-priced in the beginning, but because things have become more efficient on the planet.
“You want to make sure you have that right next plan for sponsors too.”
How important should fees be to the client?
Elliot Kallen: This leads us to the big question. Everybody is interested in lowering the price. I don’t care if you’re buying tires, oil, or food, you’re looking to get a lower cost. Since I’ve been doing this now for up to 29 years, there has been a race to the bottom of the feeds.
A lot of pressure. Your competitors are putting it on you, and my competitors are putting it on you. The internet is putting pressure on all of us to lower fees, to be more transparent about fees. There are lots of different ways of measuring fees and measuring success. How important should fees be to the client?
Trey Banton: It’s not so much about the fees being competitive because a lot of them already are.
“Fees are lower than they’ve been ever since I’ve been in this business. That’s because of all the downward pressure.”
As an advisor, you need to be able to explain what those fees are because they are broken down into different categories. You have investment fees. If you want the lowest possible investment you’re going to go with index-based funds. Your portfolio is going to run seven to 10 basis points.
Others say they want some alpha because of there’s volatility in this market. Let’s have actively managed funds. Those funds run anywhere from 30 to 50 basis points. I think you and I agree that you need to have a balance between active and passive. From a fund portfolio point of view, you’re looking at about 30 basis points on average for a portfolio on a linear basis. That’s a big change from 2015.
“All these funds had 12b(1) fees built into them. All those fees have now been stripped out, and everybody has their categories.”
A lot of companies look at the average account balance of the portfolio of the plan as a whole, and the price is based on the flow to assets. Therefore, you want to look at the different providers and see what is the best fit for your wheelhouse.
“Different companies look at different ways of pricing plans.”
As an advisor, you also want to go in and say what your role is, what you’ll do for them, what your compensation portion is. There’s a lot of advisors out there that will do pretty much just the bare bones. Is your advisor picking out finds and selecting providers or are they following through and being a plan for insurance? The range of where the fees are going to lie vary.
“The main idea is that you need to make sure you’re getting what you’re paying for and understand what that means to you.”
There are three levels: Investment based fees for the mutual fund company, separate fees for people like Transamerica, and then the advisor fees for compensation.
What makes a great 401(k) advisor?
Elliot Kallen: You’ve been around a long time, and you’ve had experience with people that bring plans to potential clients and current clients. You’ve seen the good, the bad, and the ugly. Our industry has the good, bad, and ugly like most industries do. We have the honest and occasionally the not so honest. We have those that smile in the press, a whole group. In your opinion, what makes a great 401(k) advisor?
Trey Banton: A great advisor comes down to what their role is.
“From my perspective, a great advisor is the guardrails for the company’s retirement program. They’re the checks and balances between the providers, investment companies, and the plan administrators.”
Part of your role as a fiduciary advisor is going through and making sure the plan sponsor has the best of all worlds. Part of that is going through and benchmarking. You as the advisor, have to go out there and research the different companies that are available to clients. That way you know what the industry offers, and what the plan sponsors can need to solve their challenges.
What do you recommend for trustees reviewing plans and participant education?
Elliot Kallen: We do annual meetings for trustees and employees’ education. We recommend that they can be via zoom, or recorded and shared. What do you recommend? How often should trustees be reviewing the plan, and how often should participants be exposed to education?
Trey Banton: The plan sponsor should be reviewing the plan regularly at least once a year. For investments, it’s usually twice a year. They should know how things are going, if the funds make sense, and if they are doing what they are supposed to.
From an employee’s point of view, it’s a little bit different. The requirement for a plan sponsor to their employee is they need to require educational meetings at least once a year, but once a year doesn’t accomplish the goal that we’re trying to get to. What you want to look at is our new environment, like Zoom and WebEx. We can go through and do VC meetings for employees regularly, live or prerecorded.
“The idea is that you want to make this a tangible benefit for the plan sponsor and for their participants to truly understand what’s going on with their program.”
From a Transamerica point of view, we’re taking it one step further. We’re doing the virtual meetings, live meetings, and incorporating a push education system. Those customize communications to each employee. So as long as we have their email addresses, we can educate employees based on where they’re at.
For example, someone currently puts in 3% per year with the plan sponsors matching up to 6%. What would it mean to the employee to have a greater contribution? Maybe they are 26 years old, and they haven’t started participating yet.
What are the advantages of starting early? We’re trying to look at different groups of employees, look at where they’re at, look at their life cycle and try to push the communication out towards them. It’s more in their interest wheelhouse, and they can enjoy what the program has offered to them.
Why choose Transamerica?
Trey Banton: There’s a lot of things out there when it comes to investments that are just table stakes. The question is: What are we doing differently to make things better for plan sponsors?
Number one, our pricing philosophy is different.
Most plans price on average account balances, which means the larger the average account balance the better the price is going to be. What we’re trying to do is generate participation in the plan. What we’re looking at is potential flow assets, not actual.
For example, you have a plan right now is 65% participation. We know that once we go in there and do educational meetings, we’re going to average about a 17% increase in participation. So, we’re basing our pricing based on those flows to assets, not based on just average account balances. This generally goes against the philosophy of most companies. What it’s going to do is bring down the average account balance per employee, if we’re successful.
Number two is PASS services.
We’re trying to make things easier and streamline everything. When it comes to PASS services, it’s called plan administration service support. What we’re doing is outsourcing a majority of the day-to-day administration. We can outsource about 80 to 85%. Communications loans, distributions, employee tracking, employee investing, all of that can be done to our system. We can blast those things on the app, to the plan sponsor.
Another unique thing is that we have probably one of the strongest payroll integration programs out there.
It’s called Pay Stark. Currently, we have probably a relationship with over 100 different companies. We have a 360 relationship with about 36 different companies. Whether it be Paylocity, Paycor, or ADP, all those companies bought into our system. They use us to do the integration with their companies.
Lastly, you want to come into a committed space.
There are 15 major providers in our space right now. There’s going to be a lot more consolidation, and they’ll probably go down to eight or nine over the next five years. Our parent company, Aegon, was probably the third-largest provider of retirement plans in the world knows that trans America is a growth center for them. They’re going to invest over $300 million over the next five years to make sure we stay ahead of the curve for where the markets going to go. We’re going to use that investment long-term to make sure you stay competitive.
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