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AdvisorNews - April, 2013

A beginner’s guide to working with 401(k) plans

By Paula Aven Gladych

November 28, 2012

(AP Photo/John Amis/File)

Working with 401(k) plans as a benefits broker may seem like the holy grail of benefits work, but financial advisors and agents should first figure out why they want to do it and what value they can offer to plan sponsors before they begin prospecting.

Finding a niche is important, but benefits brokers also must understand that it is not an easy business to get into and that landing a 401(k) plan as a client isn’t the hardest part.

Many financial advisors and agents want to get involved in 401(k)s because of the money and the opportunities that kind of work affords on the side, like personal wealth management clients. But, working with plan sponsors is “very time consuming,” said James Holland, assistant compliance officer and director of business development for Millennium Investment and Retirement Advisors, LLC in Charlotte, N.C. “It might lead to individual business, but helping a plan sponsor run an ERISA-compliant plan is time consuming. There are a lot of things that have to be done for plan sponsors because they are not familiar with or are not qualified to do so.”

Holland recommends that individuals interested in approaching group accounts partner with others who have different strengths and who also want to work with 401(k) plans. “You can’t be a jack of all trades and a master of none when talking ERISA,” he said. “The retirement space is very complicated and ERISA is very complicated. You are better talking to your core competency and finding a partner who will help you in developing opportunities but, more importantly, [help you] protect your client relationship.”

Stuart Robertson, president of Sharebuilder 401k, gets approached by many benefits brokers that want to work with Sharebuilder’s clients.
When working with Registered Investment Advisors and broker dealers, Sharebuilder wants to make sure they have a nice clean record and that they “have a passion for helping people with their retirement plans and saving their money,” Robertson said.

The company hopes that benefits brokers that want to work with Sharebuilder are at least familiar with how to compare the cost and performance of different plans and have perspective on how to make a client understand one 401(k) plan over another, he said.
Out of the many advisors that approach Sharebuilder, “maybe 5 to 7 percent are experts. Most others really want to get into this but don’t understand how complicated it is to help businesses decide on which plan is right for them,” he said.

Benefits brokers who tell Sharebuilder they want to just add a little something extra to their current business are not considered. “They have to be committed to it. That’s important,” Robertson said.

Working with a 401(k) plan isn’t like working with an individual client. “It is a longer sales cycle. They need to be persistent,” Holland said. “Someone is not going to make an ERISA decision after meeting you for 5 minutes. It takes being a true resource or partner for that plan sponsor. You can’t just call, have one meeting and move on. You have to constantly show and prove your worth because it is a complicated process.”

Holland added that it has always been a relationship business and it takes time to develop that relationship to earn the trust of plan sponsors.

Differentiation is key, he said. Holland’s company focuses on being ERISA experts. Its employees focus more on compliance than investment issues.

“Most plan sponsors don’t understand the personal liability or responsibility they took on by being part of the plan,” he said.
Because of the fee disclosure rules that were put in place this year by the U.S. Department of Labor, “now is the time to start the conversation because there is going to be heightened awareness and media attention to this space,” Holland said.
Robertson said that his company doesn’t expect the benefits brokers that work with Sharebuilder 401k to be regulatory and compliance specialists. He does want them to have a good handle on the different cost areas, what funds are not the best funds and be able to come back after a meeting with plan sponsors and recommend some good options for that company about how to save money or improve plan performance.

“The employer doesn’t want to spend time with the benefit. They want a great plan in place that is easy for them to run,” Robertson said.
Andrew Bluestone, CFP, president of Selective Benefits Group in Morristown, N.J., said that brokers and agents have rules and regulations they must follow, so before seeking to work in the 401(k) space they first have to explore what their broker dealer will allow them to present and receive compensation for.

“If you are a career agent, you need to find out from your company what options you have to be in this marketplace. Once you determine that, it will give you some direction with whom and what products you can represent in prospecting for new clients,” Bluestone said. “Do your homework. Know who you can represent prior to discussing opportunities in how you can help companies in the 401(k) marketplace. Prospecting is discussing opportunities in how you can help people, teach people and provide them transparency on what they are spending money on in the 401(k) world.”

Bluestone recommends that benefits brokers who are new to the space take along a seasoned person when speaking to new 401(k) prospects. They can help ask the right questions, provide the right information and present a proper proposal.
“That’s a great way to learn,” he said.

It is worth getting into the business because if a benefits broker can pick up large blocks of investable assets in one transaction, “it’s a much better financial arrangement and business model across the board for the advisor.”
The key to success in this business is to be a good educator, Bluestone said. “Understand what the goals are of the plan sponsor and what the individual goals are of the participants."

Advisors should provide the appropriate disclosures and transparencies for all the plan assets and educate the plan participants on a regular basis. Keeping abreast of the latest advancements in technology and changes in the tax code also are key elements for success.
"As financial advisors, our purpose is to provide a backdrop or platform for people to be able to reach their goals and not your personal goals,” he said.

He added that benefits brokers and advisors can only be successful in the 401(k) business if they have more than one client, otherwise it isn’t healthy for plan sponsors or participants.

“Ten or more plans under management is much better. Then you become an expert at what you do and can help people in a more fruitful manner,” Bluestone said.

The pros and cons of a benefit practice offering retirement plan services

By Fred Barstein

December 1, 2012

Over the years, we have reviewed issues surrounding the adviser-sold qualified plan market and ways that advisers can be more successful in this market. But for many, the defined contribution market made popular by 401(k) plans is not an important part of their practice, for many good reasons. So what are the reasons that most advisers do not focus on DC plans, and why should they consider changing this strategy?

Of the 300,000 or so financial advisers that actively sell and service the investing public, half, or 150,000, manage at least one DC plan. This is an astounding number given that there are only 5,000 that have a least 10 plans, $30 million and three years' experience - which is a minimum to be successful. Additionally, there are only 1,500 true experts who have more than 25 plans or $75 million under management. Selling DC plans is hard - it takes multiple meetings, many months and sometimes years to close the sale to a buyer who is not sure they even want to have a DC plan. More advisers are being forced to become named fiduciaries under ERISA, exposing themselves and their broker dealer to growing liability. Meanwhile, the first few years' revenue is small compared to health care plans or financial planning and wealth management.

Selling points

So why should an adviser not already in an adviser's version of 401(k) heaven - 10 plans, $30 million and three years' experience - even consider attacking the DC market? Because the DC market is hard to navigate - many wealth management and health care advisers as well as financial planners are either dabblers or sit on the sidelines.

Because few competitors sell DC plans, the adviser with a multiple disciplinary practice has an advantage, or a so-called blue ocean strategy. Selling different products to current clients is easier and cheaper than selling new clients current products or services, leveraging administrative staff as well as technology across a greater revenue base.

DC plans are a hedge against bad markets when individual investors pull out their money and refuse to invest - witness the recent Great Recession. Meanwhile, though DC account balances dropped, plan participants continued to contribute, proving the power of automatic payroll deduction. Finally, with continued health reform implementation looming, health care advisers are scrambling to find other sources of revenue.

So do the benefits outweigh the risks? You cannot go a day without reading a survey about how Americans, young and old, are concerned about retirement and not confident that they are properly prepared. As pension plans are available to fewer Americans, with the deficits in the Pension Benefit Guaranteed Corporation, with more state and local governments unable to meet their unfunded pension liabilities, and doubts by younger people about the viability of Social Security, DC and 401(k) plans become that much more important. Employers know that workers not distracted by fears of outliving their savings are more productive, and that older workers unable to retire on time have higher salaries and put greater burdens on health care plans while clogging the opportunities for younger employees. With all these compelling reasons to become a DC plan adviser, do not tread lightly - the liability and short-term money is not worth it. Go hard or go home - there is no middle ground.

Surprise! Plan sponsors chose advisers based on comfort, fit — not pricing

Chemistry, services more important than fees: Franklin Templeton

By Darla Mercado

December 4, 2012 3:23 pm ET

Fees are important to plan sponsors shopping for financial advisers, but they're not necessarily a deal breaker.

In fact, in a study of sponsors by Franklin Templeton Investments and Chatham Partners, pricing came in fourth when employers were asked to cite the reasons they selected a particular adviser. The top three: participant services, fiduciary services/ compliance, and personal fit and sales process.

Prospects decide whether they'll reject an adviser during the sales process, said Yaqub Ahmed, the senior vice president and head of the investment-only division (U.S.) at Franklin Templeton. Typically, it comes down to whether an adviser has a detailed understanding of the potential client and the plan's needs.

“Some intermediaries fall into the trap of pitching a box and having a standard response and sales process,” he said. “If you come in with a needs-based approach and couple that with a careful interpretation of the request for proposal, you can craft a response that meets the plan's specific objectives.”

Sponsors visited by ill-prepared advisers felt that they didn't comprehend the issues for the plan's demographics, Mr. Ahmed added.
Fiduciary and compliance services ranked as the second-most important factor. “Good advisers will explain those nuances — the limited scope 3(21), versus the full scope 3(38),” he said.

How advisers get their foot in the door depends largely on their referral network, according to the study.

More than 80% of the plan sponsors said that they choose which advisers to consider based on recommendations and referrals from a colleague or retirement plan service provider.

Direct solicitations from advisers are less likely to go anywhere, as only 23% of plan sponsors said this was how they select candidates.
Apparently, it helps for advisers to get some peer notoriety.

“Some practice leaders are the ones who are getting a little bit of PR on what they're doing and being acknowledged for it,” Mr. Ahmed said. “They're named among the top industry advisers and have formal acknowledgements from third parties. That goes a long way.
“There are a lot of advisers with good investment and retirement acumen, but there is sometimes a disconnect between being a good business practitioner and running your practice the right way or marketing yourself appropriately,” he said.

6 ways to prove your worth to a plan sponsor
Year-end reviews create excellent opportunities to inform, and find more prospects

By Andy Stonehouse

December 4, 2012 • Reprints

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The year-end review with the plan sponsor - an end-of-season tradition as old as the rock-hard fruitcake or the antics at the company holiday party.

But can that predictable and often cursory meeting between a retirement advisor and the plan sponsor turn into a business opportunity, especially as the regulatory climate becomes just as heated as the ongoing fiscal cliff discussions?

Bob Kaplan, national retirement consultant for ING U.S., suggests that the year-end review is indeed a great opportunity for skilled advisors to both prove their worth - especially as plan sponsors continue to "keep their options open" for better offers in a post-fee-disclosure landscape - and possibly find some options for business referrals and prospects to boost their own business in 2013.

Kaplan, speaking as part of a quarterly webinar hosted by ING U.S., said the year-end meeting is indeed a good time for a retirement advisor to set all modesty aside and point out the positives they've been able to bring to a sponsor's retirement plan - increased participation, increased deferrals or even better overall costs.

"It's a perfect time to take credit for your accomplishments over the year - like anyone, do not assume that the bosses or your clients just magically notice what you do, and do not find yourself asking 'how come nobody appreciates what I do?'" Kaplan said.

"It's a great time, especially in this era of fee disclosures and fiduciary concerns, to ask a sponsor, 'Do you have any concerns?' And it's better to have that discussion up front, rather than having a client say 'I wish you would have told me about that' at a later date."
Most importantly, it's an opportunity to manage expectations, so that plan sponsors don't expect too much, or too little, over the course of a year of advisory work.

Here, then, are six suggestions on how to use that meeting to open a dialog - and possible find more business traffic.

1. Know Your Audience
In making the pitch (or laying out the facts) for your 2012 accomplishments, Kaplan notes that it's important to understand who you're talking to, and to cater the presentation to that person. And, more importantly, make it personal, if possible.

"You need to recognize the role of who it is you're speaking with, and what they view as plan success," he said. To that end, CIOs and CFOs will want concrete numbers, all the facts and figures and some statistical information to demonstrate what's happened in the plan in the last year.

HR directors, on the other hand, want to keep their employees happy, so they'd rather hear about things that will do that - loans, allocations and other options geared for participants. And company owners, especially at small firms, will simply want to know what's in it for them on the bottom line.

"As you look at anyone's relationship to the plan, it's also a good idea to actually look at their own specific retirement account and see how they did this year. Their perception starts with themselves."

2. Feedback on Plan Design
Now's the opportunity to ask how the plan is doing, from the sponsor's perspective. Show them that you have the numbers to back up what's actually happened, but ask about their perceptions, their concerns, their worries, he notes.

That includes a good discussion on issues including loans, contribution rules and investment options that are part of the plan. It's also a good time to note if other factors might be contributing to the success (or lack thereof) of the plan: have there been hirings or layoffs, or have the participant demographics changed -will older employees stick around too long and end up costing a lot to the plan?

"If you see that more money is going out of the plan in loans than is coming in, it might be a case that they're not letting participants know about the risks in defaulting on those loans," he said. "They need to remember that those loans are not a protected benefit."

3. Report on Participant Success
Here's the biggest measure of your value as an advisor, Kaplan said. If you can quantitatively measure participation rates and contribution rates and demonstrate that your educational efforts are paying off, you're doing your job.

"Sponsors want people to retire, and retire successfully, because they can and they want to," he notes. "When participants are happy, HR and the CFO are happy, too.

4. Help Sponsors Figure Out if Fees Are Reasonable
While ERISA mandates that plan sponsors demonstrate that their retirement plan fees are reasonable, Kaplan also notes that reasonable doesn't necessarily mean that the absolute cheapest is the best.

But "reasonable" also includes substantial documenting practices and procedures and an advisor can help with benchmarking those fees - and advisors have to make sure that both they and the sponsor document every required fiduciary step taken along the way.

"You can document everything - start by saying what you intended to do for the year, such as increasing participation rates. Then, at year end, you can say 'here are my results' through your statement of services. You should also document the actual amount of time you spend on each part of your dealing with a plan. That way, when the competition comes in, it will put you in a good light. All of it helps create a sense of reasonableness in the fees sponsors pay to you."

5. Managing Participant Feedback
While many may see this year's fee disclosure regulations as a non-event the same scale as the build-up to Y2K, Kaplan said it's important to let sponsors know that this is a work in progress - and that the generally subdued reaction from the larger participant universe may be because they simply haven't actually seen - or even been charged - fees so far.

"There hasn't been a lot of push-back, but it's still a case of balancing what might be charged versus what's actually charged in the end, at which point it won't matter," he said. "In many plans, the fees get charged at the beginning of the year or at another time and won't appear on the participant statements. Again, please consider managing those expectations, as they may change in January."

6. Document Any Changes
Finally, be sure to check with the plan sponsor to make sure there aren't any hidden surprises that have taken place in the plan over the course of the year. It's a good time to discuss and review plan design and any operational changes, and point out any amendments or updates. And make sure they're documented, if required.

"Even if this is not your legal responsibility, it's good to do - and that's an effort that continues to put yourself in the best light," Kaplan says.
Kaplan also reminded advisors that while they are not necessarily responsible for providing fee disclosure documentation to plan sponsors, they can provide a good intermediary role as sponsors have likely been inundated with paper from their plan providers and can help walk them through the process, as well as benchmarking the fees and helping with the full pile of required documentation.

On the Benefits of Unbundled 401(k)s

Going forward, advisers working on company 401(k) plans are going be graded on how well they prepare their plan participants to meet their retirement needs. What an adviser should seek in a 401(k) partnership is the ability to provide the most cost-effective plan that produces the best result for clients. These days, advisers can best accomplish that by adopting what I call “the iTunes approach” instead of the old-fashioned vinyl approach.

When we talk about building 401(k) partnerships, there are two models in the retirement plan space. The old-fashioned one is called bundled. That’s where all the different services for 401(k) plans – financial advisory services, record keeping, third-party administration and custodial services – are offered by the same entity. In an unbundled environment, a different entity provides each of these services, and that’s their core competency.

One huge advantage of using the unbundled approach is that if for some reason one of those providers underperforms, you don’t have to throw the baby out with the bathwater. You can simply replace that one element instead of replacing the entire plan.

The unbundled environment offers other forms of flexibility too. When you deal with an institutional plan provider, their plan comes with a preselected fund line-up. You might only like five of those funds, but you have to accept all 25 of them. Just like a vinyl record, you have to take the good with the bad. The problem with that is that institutional vendors don’t always pick those funds for the right reasons. They might have profit motives that aren’t necessarily in the best interest of the participants, and that can lead them to include their own proprietary funds in the fund lineup.

As an advisor working in the unbundled environment, you have the freedom to choose the best selection of investments out there – much like creating your own iTunes playlist. That can help you focus on delivering the best results to the plan participants. It can also keep costs down because you can now bring in lower-cost funds – like ETFs or index funds – that institutions may not offer.

Historically, a lot of big institutions operating in the bundled space have charged asset-based fees, meaning they charge for their services based on the size of a participant’s account. They might charge a participant with a $500,000 account 10 times as much as a participant with a $50,000 account, even though the scope of the work is identical.

An adviser using the iTunes approach has the flexibility to choose service providers that charge a flat-dollar fee, where each participant is charged the same amount regardless of account balance. More equitable fees are going to become increasingly important now that plan participants can see exactly what they’re being charged. After all, the adviser who selects the service providers is going to be held accountable for fees that seem unfair.

Bundled, institutional 401(k)s cost more and have less flexibility, but they’re easier for advisers to use. Working with unbundled plans, on the other hand, involves a bit more work. But for advisers, the payoff for that extra effort is setting yourself apart by making participant outcomes the top priority.