It is well known that fraud follows the money, so it may
seem like it was only a matter of time before fraudsters expanded into what are
many consumers’ largest individual accounts: their 401(k) plans. The Secure
Retirement Institute has been exploring the evolution of this threat with
consumers, plan sponsors and major record-keepers.
In a recent survey, the SRI asked more than 250 financial
advisors in the defined contribution industry to describe the impact of
financial fraud and the importance of fraud prevention programs within the
institutional retirement space.
The study found that recent experience with fraud — and
concern about future events — are far stronger among the largest advisory
practices, with momentum seemingly driven by their plan sponsor clients.
However, fraudsters tend to target individuals and not the plans themselves. So
advisors with smaller DC practices may want to take more of a lead,
particularly as an avenue to strengthen relationships with (current or potential)
wealth management clients, who are often the most likely to be targets.
Largest Advisors Most Likely To Report Growing Risk
For most financial advisors in the DC industry, advising
401(k) plans represents a relatively small part of their practice. In fact,
more than half (51%) of respondents derived less than 20% of their professional
income from advising DC plans in the preceding year, while only 15% had earned
at least half of their income from these plans.
In our analysis, we use advisors’ share of income from
401(k)s to create three profiles: occasional (1%-19%), medium (20%-49%) and
core (50%+). These three advisor segments report considerably different
experiences and expectations regarding fraud. Similar trends emerge when
considering an advisor’s number of plans or their assets under management. In
each case, the advisors with greater exposure to the DC market have far stronger
concerns about and expectations for fraud prevention.
Advisors with at least $100 million in AUM are significantly
more likely than their peers to report that fraud had increased over the past
two years. For most advisors, fraud experience had not changed significantly
over that term. Nearly half of all advisors (47%) feel that the rate of
attempted fraud within their DC plans had stayed the same since January 2018,
with another quarter (26%) indicating they were unsure.
While 14% of advisors reported an increase in the rate of
fraud attempts, they were nearly matched by the 13% who reported an overall
decrease. Among advisors with at least $100 million in AUM, however, more than
one in three (35%) had seen an increase over two years, fully five times the
rate observed among advisors with less than $25 million in AUM.
Concern Is Being Driven By The Sponsors
Although relatively few advisors reported an increase in
fraud, far greater numbers (43%) indicated that they and, to an even greater
extent, their plan sponsor clients (51%) are growing increasingly concerned.
While the disparity here is not particularly large, it is
notable that advisors across the board report higher sponsor concern than
personal concern. For example, while 55% of core advisors are increasingly
concerned about fraud, 66% report the same for plan sponsors. On the other end,
only 36% of occasional advisors are personally growing more concerned, while
44% believe their plan sponsor clients are. As such, increased awareness and
focus on fraud prevention programs seem to be driven more by plan sponsor
clients than by the advisors themselves.
More than half of advisors (52%) believe their prospective
plan sponsor clients are raising their expectations for retirement plan service
providers’ fraud prevention capabilities, but this rate improves to 78% for
advisors with $100 million in AUM. Those with more exposure to the market, or a
focus on the large market, are far more likely to see plan sponsors raising
their expectations. While advisors to smaller plans may feel less pressure to
prioritize fraud prevention, the value of proactively bringing this concern to
the attention of potentially unaware clients should not be overlooked.
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