Advisers have poured into defined-contribution territory
over the last several years. Before the 2008 recession, approximately 150,000
out of 300,000 active financial advisers were getting paid for services provided
to a DC plan, according to figures from The Retirement Advisor University. That
number has since ballooned to 250,000. According to Labor Department
statistics, there are approximately 500,000 401(k) plans in the country. Around
159,000 of those have between two and nine participants (generally considered
the “micro” market) and 274,000 have between 10 and 100 (the “small” market).
Smaller plans are where people typically recommend fledgling 401(k) advisers
get their start.
ERISA AND PLAN DESIGN
Having a working knowledge of the Employee Retirement Income
Security Act of 1974 is pertinent, advisers say. Learning the act's rules and
regulations is the main differentiator between wealth management and retirement
plan advising, said Robert E. Pike, president and chief executive at Stratford
Advisors. There are several online resources to help, such as those provided by
the Plan Sponsor Council of America and fi360, a consultancy on fiduciary
matters.
As Fred Barstein, founder and chief executive of TRAU,
points out, advisers don't need to be ERISA experts. They can partner with
record-keeping firms or independent third-party administrators who can provide
that expertise. Advisers do need to have a technical understanding of the inner
workings of 401(k) plans, though — for example, knowing plan design and the
functions of different vendors such as record keepers and TPAs — to be able to
hire and monitor experts.
An important part of managing vendor relationships is
understanding all 401(k) fees and benchmarking them.
SALES
Most advisers are skilled salespeople, but 401(k)s require a
different sales approach and entrepreneurial mindset. The buyer isn't the user
in the case of DC plans, because pitches are aimed at a human resources
employee or chief financial officer, for example, rather than plan participants.
Wealth managers are also more accustomed to selling to individuals, whereas
401(k) plans, especially those of larger organizations, involve tailoring
conversations to a group.
Bank of America Merrill Lynch's Joe Mrozek said
retirement plan advisers must tweak their service models from those used with
wealth management clients to be successful. As head of corporate and
middle-market business development and adviser programs, Mr. Mrozek and his
60-person team offer support for BofA's network of 401(k) advisers. Whereas HNW
advisers meet with clients perhaps a few times per year, an average 401(k) plan
client requires more attention. Advisers can expect to provide monitoring
reports, meetings for new plan enrollees, and fiduciary committee meetings
several times a year.
The number of Merrill advisers actively prospecting 401(k)
business is up 7% year-over-year, or approximately 1,000 advisers, through
April. The firm had 14,370 advisers total as of June. Mr. Mrozek attributes
that rise in part to the diminishing presence of pensions and a turn toward
401(k) plans as the retirement savings vehicle of choice.
But 401(k) advisers' margins are getting squeezed, largely
because of DOL fee-disclosure regulations and the hypercompetitive nature of
the 401(k) market, so continuing to add plans to an adviser's book of business
is important to remaining profitable, Mr. Barstein said.
PROSPECTING
Scoring a meeting is the most challenging issue for all
advisers, from the specialist DC advisers to the “blind squirrels,” when
prospecting for 401(k) business, Mr. Barstein said. Making use of existing
wealth management relationships, if those clients happen to be business owners,
is a good place to start because there's already an established trust, advisers
indicated.
Networking with business owners at functions sponsored by
associations such as the Chamber of Commerce could also prove effective. However,
there are ways advisers can make that barrier a bit less daunting. Mr. Pike,
for example, believes the most effective prospecting method is targeting
clients that mesh with an adviser's practice. He describes Stratford Advisors
as “quants” and “geeks” specialized in using “academic firepower” in their
investment approach. Therefore, his retirement clients tend to be professional
services companies, such as engineering or law firms, with a skilled labor
force. Prospects were targeted based on NAICS (North American Industry
Classification System) codes, which Mr. Pike broke down in a spreadsheet and
identified the 25 codes with which his firm best matched.
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