As defined benefit plans continue to disappear, more American workers are relying on defined contribution plans, like 401(k)s, to save for retirement. And because the defined contribution market is booming, many advisors and benefits brokers who’ve never worked with retirement plans would like to break into this market. They just don’t know where to start.
“It is a complicated world,” says Phil Chisholm, vice president of defined contribution product management for Fidelity. “It’s difficult for an advisor to step in and say, ‘Today I’m going to be a 401(k) advisor.’”
That’s why he advocates that anyone interested in working with 401(k)s start by aligning themselves with someone who’s already successful in that environment. If the advisor’s an expert on investments, she could team up with someone who complements her skills, like someone who specializes in plan design or education.
It helps build knowledge and gives individuals a better understanding of the elements that go into 401(k) sales and service, Chisholm says.
He also recommends that anyone interested in becoming a 401(k) plan advisor should get out there and learn as much as they can about the retirement business. That means acquiring industry designations, joining local groups, taking college courses on financial planning (with a retirement focus) and taking advantage of educational offerings from industry groups such as the American Society of Pension Professionals and Actuaries and the College of Financial Planning.
“The more networking abilities they build and the more confidence they have in their own abilities the better level of support they can give plan sponsors,” Chisholm says.
Financial advisors also should build strong relationships with individuals outside of the industry as much as possible, like CPAs, insurance brokers, auditors and local chambers of commerce, he says. They also should cater to industries in which they are personally knowledgeable and focus on those types of businesses in regions where they want to do business.
Brokers who have never worked in the 401(k) market should start their journey with smaller plans or startups. Those are the “types of organizations that are going to be elementary in their needs, so advisors can build knowledge by focusing from the ground up,” Chisholm says. A novice wouldn’t even know where to begin if a $100 million plan dropped in their laps.
The world has evolved quite a bit in the past decade, he says. It’s very difficult to be an advisor who sells one or two plans and can service them appropriately. Fee disclosure and compliance regulations have made it very difficult to be in the defined contribution marketplace, he says. It requires some level of specialization.
Jason Grantz, an institutional consultant with Lexington, Ky.-based Unified Trust Retirement Plan Consulting Group, says there’s a big gap between the advisors who are real experts in qualified plans and newer advisors who are just learning the business while trying to attract clients.
He says that working with those who already have expertise in the 401(k) space is a good way to learn the business. Then they are splitting accounts instead of competing against each other for that business, Grantz explains.
Many new regulations have come into play during the past few years and more are on the way, including changes to the Securities and Exchange Commission’s and Department of Labor’s fiduciary standards.
“I do think it is a very specialized area of the broader financial marketplace, a poorly understood one in aggregate,” Grantz says. “Even in the circles I travel in, retirement plan professionals, there’s a spread between those who are elite and those who are just simply knowledgeable about providing service.”
There are two models out there advisors use for their business. Some want to be the best in the qualified plan space. Others operate on a more general contractor model where they work with other skilled people and bring them in as needed. Both models work very well, Grantz says.
The Online 401(k), for example, deals with numerous advisors who haven’t worked with a lot of 401(k) plans in the past.
“They say, ‘I don’t understand any of this. Make it easy for me. This is new for me. I don’t want to misstep. I don’t want to commit to work that is not profitable for me,’” says Craig Howell, director of business development at The Online 401(k).
“We’re one of a few vendors who are not interested in working with experts. We spend a lot of time helping advisors figure out if they want to be in the industry,” he says.
“Organizations like mine, because we service that small business segment, we are highly packaged. An advisor doesn’t need to do much of anything,” Howell adds.
If advisors move up market they need to be more sophisticated. The small plan market is a good place to start, he says.
Howell asks individuals who approach his company if they want to be a 401(k) expert or if they want to aggressively pursue the 401(k) business. He also asks if they would rather work closely with employees rather than have ERISA expertise. Once they determine why they are doing it, he presents them with a series of questions about which services they want to provide:
Do you want to be an investment fiduciary? He points out that becoming a fiduciary is a big responsibility and has many liabilities. “It is not for everybody, in fact, for very few,” Howell says.
Do you want to have an understanding of plan design? This also requires expertise and training, he said, but there aren’t as many liabilities as when working with investments.
Do you want to educate employees and get in front of them to offer additional services?
Do I not want any of that? Am I doing this as an accommodation? Howell points out that some investment professionals get involved in the 401(k) business not because they want to but because they need to.
Do I want to help with a vendor search and make sure they have benchmarking available?
Once advisors have asked themselves these questions, it’s time for them to do their homework.
There’s a multitude of training opportunities available in the marketplace to help advisors specialize in plan design, fiduciary responsibilities and employee education. Plenty of vendors can provide training on those elements, but few do all of those components, Howell says.
Prospective 401(k) advisors also need to ask themselves if they’re charging the correct fees for the services they’re offering.
“The regulatory environment is much more stringent over the past five years than it was in the late ’90s,” he says. “In this instance, the industry was taking advantage and the regulators stepped in to clean that up a little bit, and they have.”
Howell adds that the industry made its bed. If they had been transparent about their fees, “they probably wouldn’t have regulators sitting over their shoulder the way they do now.”
The greatest opportunity right now in the 401(k) marketplace is servicing smaller plans or startups, Chisholm says. He encourages advisors to team up with companies like Fidelity that serve plans of all sizes.
“We take a lot of the complexity out of the process. We have trustee services, administration and recordkeeping and a suite of mutual funds offered on our platform,” Chisholm says.
The average 401(k) plan that comes to Fidelity is around $4 million to $5 million in assets. Twenty-seven percent of the plans serviced by Fidelity are advisor-sold.
“There’s a glaring need at the lower end, the emerging company size plan. They don’t have the infrastructure or the knowledge to run their own retirement plan,” Chisholm says.
Unified Trust’s Grantz believes there are two primary skills every successful retirement plan advisor has: They are very effective leaders who can impact peoples’ attitudes and behaviors in the way charismatic leaders have the ability to do and every one of them is an effective communicator.
“Communication in very complex topics is extremely difficult,” Grantz says. Effective plan advisors need to be able to communicate to retirement plan committees and plan participants about very technical topics and get them to understand what is being presented to them.
Unfortunately, small companies don’t have a lot of resources, so the primary person running a company retirement plan is usually the same person managing its health care benefits and human resources duties.
Retirement plans usually take a back seat to health care so it takes a special kind of person to get the retirement plan committee to “pay attention to the plan and take their role seriously and professionally and to, over time, teach and coach them to be prudent experts, which ERISA requires them to be,” Grantz says.