yellow building block among shiny gray and black blocks Edelman Financial Engines is stillin the earliest stage of developing a platform that can beintegrated with human advisers to access the more than 1 millionplan participants currently serviced on the Financial Engines side.(Photo: Shutterstock)

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When it was announced last spring that Hellman & Friedman,the private equity firm that already owned a majority stake inEdelman Financial Services, was throwing down $3 billion in cash totake 401(k) provider Financial Engines private, one prominentindustry voice predicted the deal would present anexistential threat to trillions of dollars in potential IRA rollovers.

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“It may mean the beginning of the end of the giant 401(k)rollover bonanza that powers so much growth in the advice businesstoday,” wrote Michael Kitces, a partner with Pinnacle AdvisoryGroup and publisher of the Nerd's Eye View blog.

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Pairing Financial Engines, the largest 401(k) automatedfiduciary investment platform provider that added more than 900 newplan sponsors in 2018, with Edelman Financial, one of the largestretail RIAs with 320 fiduciary advisers across the country, is afirst-of-its kind arrangement.

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The merger stands to crack a code industry has been wrestlingwith: How do you deliver comprehensive human financial planningdirectly to retirement savers in 401(k) plans?

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“The great thing about providing the advice in-plan is thatparticipants don't need a rollover to get the advice relationshipin the first place—they'll already have it,” explained Kitces in anemail.

Game-changing event

As of the end of 2018, IRAs held $8.8 trillion in assets, orabout one-third of the $27.1 trillion retirement market. IRA assetshave increased an average of 10 percent a year over the pastquarter century, according to the Investment Company Institute.

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That growth has been fueled by rollovers from workplaceretirement plans, ICI data shows.

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In mid 2018, 42.6 million, or 33 percent of the country's totalhouseholds, reported owning an IRA. Among those households withrollovers in traditional IRAs, 57 percent had only rollover moneyin their accounts, meaning they have never made other contributionsto their IRAs.

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Ric Edelman

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Can the merger that formed Edelman Financial Engines—substantialas it is—really disrupt all of that rollover momentum?

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“In the long run, I believe Michael [Kitces] will prove to becorrect,” Ric Edelman told BenefitsPRO in an interview.

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“This has never been done before in the RIA industry,” he saidof the merger. “It's a game-changing event, and we have everyintention of delivering on the potential the merger creates. Thatwould be disruptive to industry, but in favor of clients, and inthe end that's all that really matters.”

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In serving his retail clients over 30 years, Edelman has foundthey need and want help across all of their assets, regardless ofwhether they are held in qualified retirement plans or not.

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ERISA has specific restrictions on when advisers can offeradvice on assets not held by the adviser.

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“That's one of the reasons why advisers like to encourage IRArollovers,” explained Edelman. “And they recognize they can earncompensation for doing so — compensation that could exceed whatplan participants would otherwise pay if assets were left in 401(k)plans.”

Putting buggy-whip manufacturers on notice

That inherent conflict is eliminated under Edelman FinancialEngines, said Edelman. Retirement plan savers' ERISA-qualifiedassets are held under the Financial Engines arm. Fiduciary adviserson the Edelman side will be allowed to advise what to do with thoseassets upon retirement.

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“If we are able to pull this off as we hope, there are a lot ofbuggy-whip manufacturers that will be put on notice,” said Edelman,referencing the disruption Ford's Model T had on the horse andbuggy industry a century ago.

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“For advisers, brokerages, and fund companies that depend on IRArollovers for their asset flows, they are correct to be concernedabout their business models,” he added.

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If disruption comes, it shouldn't be expected over night.

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Edelman Financial Engines is still in the earliest stage ofdeveloping a platform that can be integrated with human advisers toaccess the more than 1 million plan participants currently servicedon the Financial Engines side.

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“The jury is out on what this will actually look like, and howand when we deploy it,” said Edelman. “Because it is such apotential game-changer we want to take the time to get it right.We're confident we are going to develop a platform that constitutesbest practices, and that it will be widely accepted by ourworkplace clients and become the industry standard for the entireRIA community.”

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Recently, Edelman Financial Engines rolled out a foundationalbuilding block.

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The Fiduciary Distribution Review will provide free, one-on-onerollover reviews with an Edelman fiduciary to any company plansupported by Financial Engines that wants to offer the service.

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The genesis of the program began with what Edelman said wasanecdotal evidence showing many 401(k) participants are unaware oftheir options when retiring or separating from an employer.

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A recent commissioned survey of more than 1,000 planparticipants by the company shows just how many are in the dark onrollovers. About four in 10 said they had no idea that leavingmoney in-plan was an option—they assumed that the rollover wasrequired, the study found.

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“The survey was done to quantify our suspicions,” he said. “Thatso many participants don't know they have the option to leave moneyin plans demonstrates a real lack of knowledge. That can subjectthem to higher fees, taxes, and risks that are otherwise avoidable.We want to assure employees have all the information they needavailable to them.”

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The “significant marketing push” by brokerages and fundcompanies has tempted some providers to offer rollovers withoutadvising clients that they are not mandatory, thinks Edelman.

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While he cautioned that it is still early, Edelman said that thefee schedule for clients that ultimately do roll over assets from aFinancial Engines plan to an Edelman adviser may not change.

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“There may not necessarily be a difference in cost,” he said.“It's conceivable that what the client was paying in the workplaceplan will be maintained post employment.”

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If that's the ultimate upshot, regulators will be bound to takenotice, said Edelman.

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“The structure we're developing is consistent with whatregulators are developing,” he said. “I'm convinced they'll helpfacilitate the direction we are pioneering, because it is soclearly in clients' best interests. That will put further pressureon the rest of the marketplace. If we can do it, they should beable too.”

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READ MORE:

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Big 401(k)s shedding pro rata recordkeepingstructure

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More recordkeeper M&As coming despite “spottyhistory” of capturing efficiencies

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Broker-dealers expected to be gun-shy on rolloverrecs under SEC's Reg BI

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House votes to halt SEC Regulation BestInterest

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.