For the past decade, mutual funds have dominated the investment menus of self-directed small business retirement plans. But if you want to "go where the growth is," offer small business owners in your market a self-directed brokerage option (SDBO).
These options are the equivalent of a brokerage account inside a participant-directed retirement plan. Cerulli Associates reports that about 15% of all 401(k) plans now include SDBOs. According to Charles Schwab, three-fourths of the new plans it has opened recently offer SDBOs, and the firm's total assets in these accounts now exceeds $5 billion.
Many large 401(k) plans have shied away from SDBOs due to their added recordkeeping cost (typically $50-100 per participant per year) and the perception that these options increase fiduciary risk and administrative complexity. But small businesses with 25 or fewer participants are a natural market for SDBOs, especially when key participants have diverse investment goals, along with a common desire to reduce costs.
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For example, suppose that a small medical practice has three partners, each with about $200,000 invested in a 401(k) plan. One partner wants to buy stocks, another wants to hold bonds, and a third wants to diversify among exchange-traded funds (ETFs). Even with SDBOs' extra recordkeeping costs, total investment expenses for all three partners will probably be several thousand dollars lower in SDBOs than in a mutual fund turnkey plan averaging a 2.0% management and expense ratio (MER). You can build into the SDBO an asset-based fee for yourself (similar to a fee-based brokerage account) and still beat the all-in investment costs of most mutual fund plans.
To start prospecting, take advantage of a new feature now available in the Fund Finder service of Premium ERISA. For more information about Fund Finder, look here:
The new feature allows you to search plans in your market by mutual fund provider and ZIP CODE. In a few minutes, you can generate a list of funds in nearby zip codes that offer their participants (let's say) Janus Funds.
In an SDBO, participants who want to pay the cost of Janus Funds (and many other fund groups) can continue to do so. But other participants would have the option of reducing costs by buying and holding individual stocks, bonds or ETFs.
Fixed-income investors are worried about the impact that higher interest rates could have on bond fund NAVs. But in an SDBO, participants can buy individual bonds and hold them to maturity, greatly reducing bond price risk.
The steps in the suggested prospecting track are as follows:
- Use Fund Finder to generate a list of small plans in your market area, sorted by fund sponsor and zip code.
- Research the MERs of popular funds groups on your list. Focus on high-cost funds groups.
- Call decision-makers at the plans and offer information on comparing their all-in mutual fund expenses with the costs of buy-and-hold investing in SDBOs. The more assets a business owner personally has in the plan, the greater the SDBO's cost savings can be.
- Probe for other areas of dissatisfaction with specific mutual fund providers, and be prepared to address them with benefits of SDBOs.
Don't spread your prospecting efforts too thinly among fund groups. You'll find that some fund groups in your market are more vulnerable than others. Have the ammunition you need to discuss the pros and cons of selected fund groups, and explain how SDBOs can help individual plan participants expand investment choices while managing personal costs.
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