Saturday, August 29, 2015

‘Tipping’ Points: 4 Ways to Tell a Fad from a Trend

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 will you find an admonition to be “first.”

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 working with plan sponsors over the years, I have found that a new idea/product can quickly evolve to become a trend if it:
  • is cheap (free is better);
  • is easy (the less effort, the better);
  • solves a problem (the bigger, and more immediate, the better); and
  • has regulatory/legislative sanction (the more official, the better).
As a corollary, things that cost money, seem complicated to adopt/incorporate, or that don’t address a current perceived problem will naturally be a harder sell. (I have never found that the removal of a potential threat — such as a lawsuit — is a compelling sales proposition.) But even if all the factors listed seem to apply, that new product/idea trend can be “trumped” by one simple factor — does it mean (or appear to mean) taking on additional risk (or costs) for the plan, or the plan sponsor? If so, all the other factors don’t really matter. Those are the “trends” that “the industry” says everyone should/will be embracing… and then nobody (much) does.

Little wonder then that things like daily valuation (which, certainly at the outset, seemed to be both cheap AND easy), burgeoning fund menus (which were easy to add, if not communicate/navigate) and, more recently, target-date funds (easy, solved a problem and, post-PPA, with regulatory and legislative backing) seem to become the “norm” almost overnight. Little wonder, too, that things like automatic enrollment (certainly prior to PPA, less so these days), and in-plan lifetime income options are harder sells. It also helps explain why things like offering advice or automatic enrollment can, over time, be seen in a new light, courtesy of developments in regulations and/or technology that serve to reweight the scales.

One More Thing

There is, however, one additional factor that influences plan sponsors in their decision-making 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 (else) 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. 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.

Indeed, the best advisors stay aware and alert to new developments and opportunities — but resist the siren call of the crowd, helping plan sponsors understand both the pros and cons of new concepts, be they fads, trends or something in between.

- Nevin E. Adams, JD

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