AdvisorNews - April, 2012
Retirement industry changes on deck for 2012
By Paula Aven Gladych
December 20, 2011

2012 will be a year of change for the retirement industry. Experts agree that 401(k) plan fee disclosure rules, affecting plan sponsors and plan participants, and the U.S. Department of Labor's reproposal of its rule amending the definition of fiduciary under the Employee Retirement Income Security Act will have the most impact industry-wide. Tax reform legislation that could impact how individuals save for retirement is another issue that probably won't be decided in 2012, but will be debated a great deal.

"The biggest thing is the implementation of fee disclosure," said Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries. "This is the big new thing in 2012. People are going to get a lot more information than they thought of or wanted before. The big question everyone is waiting to assess how plan sponsors and participants will react to the waterfall of information?"

Allen Vaughn, president and chief fiduciary auditor for 401-k.pro Fiduciary Managers/The 401k Advisory Group, Inc. in Dunwoody, Ga., said he believes 2012 will be the year of lawsuits.

He fears the hoopla over the fee disclosure regulations will be like "watching a tornado destroy a town. … What is going to happen with 408(b)(2), one thing I advocated for, is it is going to show people the expenses, which I'm all for, that will make people smart shoppers. People need to see the benchmarks. They need to see what the average fund expenses are for record keeping, the average commission brokers make and the fee advisors make."

Vaughn said he's afraid that delayed rules will make it easier for companies to find new ways to hide their fees. "It gave insurance companies time to reconfigure things so they could look like they have a clean slate."

The other biggie coming up in 2012 is the reproposal of the definition of fiduciary as it applies to ERISA plans and IRAs.

"It can have a dramatic impact on the 401(k) marketplace, not just in terms of the 401(k) plans themselves, but how service providers and advisors work with potential rollover options. There could be provisions in the regulation that would inhibit the ability of service providers working with a 401(k) plan participant, with respect to them talking to a participant about rollover options as they get closer to retirement. If they do have fiduciary status, there are restrictions on compensation differences that make it impossible for them to have a conversation," Graff said.

Tax reform will be another big issue next year.

"I think legislatively, it's hard to imagine that, given the political rancor that currently exists in Congress, that they will be able to enact tax reform in an election year," he said.

Graff expects tax reform proposals from both the Republicans and Democrats. "Even if these bills won't be enacted, they may be a baseline for what will be real tax reform after the election. There is still a lot of work to be done to make sure that any attacks on retirement savings incentives are stopped or minimized as much as possible," he said.

The retirement industry as a whole needs to do a better job of educating investors. David Wray, president of the Plan Sponsor Council of America, said that his wish for 2012 is that everyone with a 401(k) or other retirement plan will sit down and take a good look at their plan.
"People need to review plans once a year. They don't need to change much. That is one thing. Pick a day when you sit down and think about your plan; all the things that go into it. Give it a hard review, true it up and rebalance," he said.

Individuals who are five years out from retirement should make a retirement budget, Wray added. They should think about what expenses they are going to have when they retire. That is their target. If they are on track, they can keep saving as they are, but if they aren't on track, they can review their portfolios to make changes that will help them meet their goal, he said.

"Everybody needs to think about their future. It is always good at the beginning of a new year to think about the future," he said. "What you have to think about is you are going to live to 95 years old and managing your money with a lifetime recognized plan makes a big difference. If you can get 30-year-olds to avoid credit card debt, their life has changed. Decisions made when they are 30 are going to impact them at 90."

Wray added that, "managing money wisely with a lifetime plan puts people in such a better position than people who manage day-to-day and don't thing about long-term. … Small appropriate decisions in your early working career can have an enormous impact in the long-term. We are only now beginning to get that understanding."

Big opportunities in small retirement plan market
By Tim Minard
January 4, 2012
When it comes to small retirement plans, the opportunity for financial professionals is significant. Today, nearly three-quarters of small businesses currently do not offer a retirement plan. But that's predicted to change---and quickly.

In fact, of the 28 million small businesses in the United States, 10 percent---or 2.8 million---plan to add a retirement plan within the next 12 months alone. And more than 48,000 small retirement plans (>$5 million in assets) are expected to change service providers. This was 90 percent of the total estimated takeover sales activity and a nearly 26 percent increase from the previous year.

Since 90 percent of small businesses use a consultant or financial professional to help with retirement plans, there is tremendous potential for those who know how to sell and service small plans efficiently.

Best practices in reaching and serving small retirement plans
The Principal Financial Group recently conducted in-depth interviews with a group of financial professionals who have had success in the small business retirement plan market. The interview group also included third party administrators and veteran wholesalers of The Principal.

Through the interviews, these experienced individuals shared their insights on best practices of financial professionals in the small plan market. We cover their best practices in depth in our white paper, "Boosting Profitability in the Small Retirement Plan Market."

The best practices of those successful in the small retirement plan market include:
1. Keep your prospect pipeline full. To market retirement plans efficiently to small employers, it's important to keep your prospect pool full. An experienced wholesaler said, "I work with a two-person team that has sold more than 50 plans in the past five years. Most have less than $5 million dollars in assets. They have a very rigid, thorough follow-up process. They stay in front of everyone they contact until they win the business or the prospect refuses to respond. They believe a 'no' is not a 'no.' It is just a 'not right now.'"
Where can you find new prospects? Leverage centers of influence (such as CPAs, attorneys, brokers and commercial bankers), network through social and professional organizations, obtain leads from current clients and research Form 5500 data.
2. Develop a cross-sell practice. Working in the small plan 401(k) market can have a multiplier effect on profitability because of the potential for cross sales. A veteran wholesaler said, "One advisor that I work with doesn't do 401(k)s for the 401(k)s. He does the business because it is a huge opportunity to get involved in everything else. He says that for every $1 in a 401(k) plan, there are $7 more in a prospect's net worth---college funds, home equity, personal accounts and IRAs."
As you work with small businesses, make sure you actively look for cross-selling opportunities. While prospects develop, focus on generating additional sales by helping meet the needs of current small business clients---the opportunities are significant.
3. Marshal your resources. The retirement plan market is complex and highly regulated, so it helps to have business associates with specialized expertise. Leverage the expertise, tools and resources that are available from third parties, such as plan service providers and TPAs to enhance profitability in the small plan market.

These associates can help with design ideas, implement and provide administrative services for small business retirement plans, as well as provide tools and resources that help you support and service your small business clients. These relationships are essential to working efficiently.

Grow---and diversify---your practice with small retirement plans

The small plan market has remarkable potential for financial professionals who employ best practices and work with business associates with complementary expertise. Studies estimate that 127,000 start-up defined contribution plans will be implemented through 2016. Financial professionals who tap into this growing market---and work efficiently in it---have opportunities to build strong practices with diversified revenue streams.

Advisors Obligated to Report Fees and Services

In mature markets there is always downward pressure on pricing and the retirement plans market is no exception. However, with the advent of the new fee disclosure rules, advisors are particularly vulnerable to a heightened level of risk associated with their obligation to report fees and services. According to the new 408(b)(2) regulations, all covered service providers including advisors will be required to provide a responsible plan fiduciary, hereinafter referred to as the "plan sponsor," with a written description of their services rendered for compensation received by July 1, 2012. This requirement represents a nuisance for many that have fully divulged their fees and services in the past, but for many others, 408(b)(2) is a nuclear bomb with potentially dire consequences. How so? Consider the following three advisor scenarios:

  • The Absentee Advisor - Compensation has been collected for years with little or no service being rendered. Will truthful admission of this fact pattern cause ERISA counsel to recommend a plan sponsor to pursue the advisor to recoup excessive and unreasonable fees paid in the past or future?
  • The Over Promise and Under Deliver Advisor - This optimistic chap will deliver an embellished written description of services, some of which have never been delivered in the past and most likely will not be delivered in the future. Will ERISA counsel suggest that a fee paid for services not delivered is unreasonable? If so, will ERISA counsel recommend action necessary to recoup excessive and unreasonable fees paid in the past and/or in the future?
  • The Insecure Advisor - This advisor hears the word benchmarking or 408(b)(2) and immediately reduces their fee, if they can, to meet a preconceived mental notion of reasonableness. Is this a knee-jerk reaction or prudent response to an excessive fee arrangement? Is it possible ERISA counsel would perceive an advisor's action to reduce fees as an admission of guilt and that fees have been excessive and unreasonable in the past? Will such a reaction encourage ERISA counsel to suggest the plan sponsor, in keeping with their fiduciary obligations under ERISA, seek a refund of some portion of past fees received? Bottom line, if the fiduciary fails to seek a refund, the fiduciary is personally liable for that portion of the fee that is excessive.

July 1st is fast approaching so advisors have little time to consider their options. However, if you are an advisor that falls into one of the three scenarios outlined, I have the following suggestions for your consideration:

  1. Resign: In addition, help the plan sponsor secure the services of a qualified advisor before July 1, 2012 so that on that date a suitable replacement is in place that shoulders the liability and responsibility for communicating their compensation for services they will render.
  2. Buy E&O: Before you do, confirm that it covers you for a prohibited transaction claim filed today for actions committed in the past.
  3. Don't Embellish: Advisors by nature are optimistic and sales oriented so it is not unusual for advisors to over promise and under deliver. Unfortunately, for many advisors that succumb to this temptation, ERISA imposes a higher standard of ethical and moral behavior which requires truthful disclosure. Also, if you decide to upgrade the services you deliver, be sure to identify the new services separately. This will help you avoid a claim that new services not yet delivered were part of the services you offered in the past but failed to deliver. Offering new services may be appropriate in light of the new regulatory demands but you do not want the new services to be used by ERISA counsel as a club to support a claim of unreasonable and excessive fees collected in the past.
  4. Collaborate with an Expert: Well-adjusted advisors know their level of expertise and weaknesses. Most advisors are stellar communicators and educators but lack the knowledge, experience and skills to deliver the level of fiduciary guidance that plan sponsors need. In fact, in many instances an advisor may be prohibited from offering fiduciary services by their broker-dealer or compliance officer. In such cases, the advisor still has an important role to play in the plan as the communications and education expert but needs to participate on a team that can offer holistic plan level fiduciary services. This is best accomplished by collaborating with a functional fiduciary advisor under ERISA § 3(21)(A)(ii), a discretionary investment manager under ERISA § 3(38) or a discretionary Trustee under ERISA § 403(a).

Advisors that do collaborate with other experts will typically participate as a solicitor. In other words, the ERISA §§ 3(21), 3(38) or 403(a) fiduciary will directly contract with the plan sponsor and the advisor will become an agent of the fiduciary or a subcontractor as that term is defined under 29 C.F.R. 2550.408b-2(c)(1)(viii)(F).

Advisors that operate as a solicitor may need to confirm their broker-dealer or compliance officer will approve and permit this business structure and the collection of fees from the fiduciary for services rendered by the solicitor advisor.

Also, advisors that operate in a solicitor role may find their business structure attacked by advisors that offer fiduciary services in a competitive situation. In such situations it is important to remember that not all fiduciaries are alike, especially those that leverage their skills to work with advisors as solicitors. Fiduciary advisors that develop a business model that includes a solicitor recognize their own limitations to serve plan sponsors from afar. To ensure they can keep a pulse on the client and to enable a smooth transition from the accumulation to the distribution phase for participants, a fiduciary needs the support of regional solicitors. A solicitor is not only providing communication and education services but also maintains the client relationship, operates as a trusted liaison between fiduciary and plan sponsor, filters complaints and is free to provide investment advice services to participants that are transitioning from active employment to a retired status.
CONCLUSION: If you are one of the three advisors described herein, take action now, don't delay. The unintended consequences of the new 408(b)(2) regulations come with significant costs. Advisors should give thoughtful consideration to communicating only those services in writing that they are capable of delivering. Advisors that claim expertise they do not have and cannot support are a train wreck waiting to