Sunday, October 23, 2005

Peer Pressures

One of the most valuable skills in my profession - and perhaps in any profession – is an ability to discern trends early. Just as valuable is the ability to discern the sometimes fine line of distinction between what may be a trend, and what may, in fact, be nothing more than a fad. Most plan sponsors have a functional aversion to the latter, and the vast majority have no real passion for being too early in the adoption of the former. After all, nowhere in the fiduciary directive to do only things that are in the best interests of participants and beneficiaries can there be found an admonition to be first.

Notwithstanding those natural disinclinations, ours is a business in which trends – and fads – constantly emerge. Whether it is simply a function of the incessant "arms race" deemed necessary to cement a provider's position in the market, or a genuine pursuit of excellence, it seems as if there is always some new idea or product coming to market. That’s a good thing for journalists, but plan sponsors, and to some extent advisors, can find it to be somewhat discomfiting. After all, adhering to that other fiduciary admonition – the requirement that services offered to participants and the fees paid for them be “reasonable” - is most certainly a fluid determination as well.

So, how do plan sponsors make that determination? One must be careful in making generalizations about such things, of course. The difference between a fad and a trend is often no more than one of time and acceptance, after all, and each plan sponsor situation is based on hugely independent factors. Still, in my travels (and travails) in working with plan sponsors, I have found that a new idea/product can quickly evolve to become a trend if it:

Is cheap
Is easy
Solves a problem
Helps participants
Seems the right thing to do

As a corollary, things that cost money, seem complicated to introduce, or that don’t address a current perceived problem will naturally be a harder sell. But even if all the factors listed seem to apply, that new product/idea can be “trumped” by one simple factor – does it mean taking on additional risk for the plan, or the plan sponsor? And, IMHO (and in my experience), if it does, all the other factors don’t really matter.

No wonder things like daily valuation (which, at least on the outside, seemed to be both cheap AND easy), burgeoning fund menus, and, more recently, lifestyle funds seem to become the “norm” almost overnight. Little wonder, too, that things like self-directed brokerage accounts, wireless PDA delivery of participant account information, automatic enrollment, and, yes, even offering advice to participants, are harder sells. It also helps explain why things like offering advice can, over time, be seen in a new light – to wit, that the risks of not offering advice may be greater than doing so.

There is, however, one additional factor that influences plan sponsors in their decisionmaking process, and as odd as it may seem, it is a factor that influences most of us from a very young age. For as surely as plan sponsors are understandably reluctant to be first to embrace a new concept, as human beings we also have a tendency to go with the flow, to follow the crowd. Fads become trends sometimes for no reason other than the rationale offered by teenagers everywhere for occasionally aberrant behavior – because “everybody is doing it.”

Plan sponsors rely on advisors not only to keep them abreast of current trends, but to help them cut through the clutter and “spin” of the latest hot product pitches, and to help them fulfill their fiduciary obligations to act in the best interests of participants by providing access to services (and services at fees) that are reasonable for their needs. The best advisors resist the siren call of the crowd, while helping plan sponsors understand both the pros – and cons – of new concepts.

Or, as I’m sure your mother once told you – “So, I suppose if everyone else jumps off a bridge, you're going to?"

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