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AdvisorNews - August, 2013

Small biz owners share how to become their ‘trusted adviser’

By Gillian Roberts

February 14, 2013

Small business owners spend their time in two buckets — work and family. When approaching them for their business, offer them something in one of these two areas. A panel Tuesday at the Workplace Benefits Renaissance conference in Atlantic City, N.J. offered brokers tips and insights like these from successful small business owners who care for their employees like family.

None of this is a surprise for our readers and those in attendance at the conference, many of whom are small business owners themselves. But entrepreneurs outside of the benefits field have different perspectives. Three tips for brokers to keep in mind about small business owners are:

  1. Respect how busy they are. According to Lewis Schiff of Inc. Business Owners Council, most small business owners spend at least 50 to 60 hours on their business per week — sometimes even up to 70 or 80 hours.
  2. Treat them like VIPS. Their vendors, employees, other brokers, etc., treat them very well, so pull out the red carpet for potential new business.
  3. Take the time to get to know something personal about them. Small business owner George Bresler of GB Collects in West Breslin, N.J. said at the panel that his adviser “knows I like Johnny Walker.” But joking aside, both panelists said a personal relationship is a key to success.

“At the end of the day, I like people who pitch me the options and trust that I’m going to weigh the risks,” said Debbie Madden, owner of Cyrus Innovation in New York City. “What I’m looking for is a continuous conversation, someone who knows when to approach me with new [benefits]. Someone who says, ‘alright in 2011 you decided this, but is it time to reconsider?’”

Noel Spencer, a broker with Spencer’s Financial and conference attendee said the panel made sense. Brokers need to “know what makes their clients tick, know their health issues, their family, what their parents are going through. That will make a client will remember you.”

Madden said one quality about her adviser, who she called trusted, is that he’s always available. “I talk to him a lot, and he’s available for all 55 of my employees to call, and they do,” she said. “I don’t know how he does it, but he’s also always coming to us with creative solutions and things we’re not thinking about.”

Bresler and Madden both said that the impact of Patient Protection and Affordable Care Act is far from their minds, and that’s due to their advisers’ assurances that not a lot will change. “One thing that caused me to terminate an adviser a few years ago was when they only came to the table right before open enrollment,” Bresler said. “Talk to me throughout the year, I don’t want to hear from you just once.”
Bresler and Madden highlighted that their success at retaining employees has been thanks to creativity on their own parts, in addition to great benefits provided by advisers. Madden and her group offer employees an option to waive a salary increase for up to six weeks of vacation in lieu of the extra bucks. Bresler takes an individualized approach with unique employees, even visiting one at home during a sick leave to ensure proper care and a return to his office.

Madden concluded by reflecting on how she got her current adviser through an instant connection: “You can’t call that selling what he did, it was one of those rare things.”

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

By Paula Aven Gladych

February 7, 2013

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’s 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,” explains James Holland, assistant compliance officer and director of business development for Millennium Investment and Retirement Advisors in Charlotte, N.C.
“It might lead to individual business, but helping a plan sponsor run an ERISA-compliant plan is time consuming,” he says. “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.”

Find the right partner

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 says. “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 says.

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 says.

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,” Robertson says.

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 says.

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 says. “Someone is not going to make an ERISA decision after meeting you for five 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.”

Build relationships
Holland adds 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 says. 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 says.

Because of the fee disclosure rules that were put in place this year by the U.S. Department of Labor, Holland says “now is the time to start the conversation because there is going to be heightened awareness and media attention to this space.”

Robertson says 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 says.

Get back to basics

Andrew Bluestone, president of Selective Benefits Group in Morristown, N.J., says that brokers and agents have rules and regulations they must follow, so before seeking out 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 on who or what you can represent for prospecting,” Bluestone says. “Do your homework, see if you are qualified and know who you can represent. 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 says.

It’s worth getting into the business because if a benefits broker can pick up $500,000 in investable assets in one transaction, “it’s a much better financial arrangement across the board for the advisor.”

The key to success in this business is to be a good educator, Bluestone says. “Understand what the goals are of the plan sponsor and what the individual goals are of the participants. “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 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 says.

5 Reasons to Choose a Traditional 401(k) Over a Roth

By David Ning

February 27, 2013

There are many wonderful reasons to invest in a post-tax retirement account such as a Roth IRA. But tax-deferred retirement savings vehicles such as traditional 401(k)s and IRAs that let you put money aside before Uncle Sam gets his share deserve a serious look too. Here are several advantages of saving in a pre-tax retirement account you should take into account before you decide that a Roth IRA is right for you:

There are more obstacles to withdrawing money early. Just because you save doesn't mean you are home free because you can often find an excuse to use the money you've accumulated. When assets are in tax-deferred accounts, there are often penalties involved if you ever need to get the money out.

Even if you comb the details of the law and find a way to withdraw your money penalty-free, you still have to pay a good chunk of taxes on your withdrawal. In a world where temptation is everywhere, these obstacles may help motivate you to leave your money in the account until retirement and turn out to be what your future self appreciates the most.

You can deduct the contributions automatically from your paycheck. Until the Roth 401(k) becomes more popular among employers that offer 401(k)s, the easiest way for most employees to save for retirement is through payroll deductions toward a traditional 401(k). By paying yourself first you don't have a chance to forget about the contributions, nor can you actually spend it because you won't ever touch that money. Having the contribution automatically invested instead of manually hitting send seems like a small convenience, but it’s amazing how much of a difference this simple adjustment can make. Try it, because it works.

Another advantage of having money in a 401(k) is that your assets are better protected. It's just harder for creditors and lawyers to go after assets in your 401(k), so use that to your advantage.

You can move to a lower tax state before you withdraw the money. A seldom talked about strategy when deferring taxes is to move to a no income tax state by the time you retire and have to withdraw from your portfolio. This way, you might be able to skip paying state taxes on your retirement account withdrawals. Moving is a huge decision that involves much more than just the state tax rate, but the option is at least available for those who choose the tax-deferred route.

A Roth IRA conversion is possible during low income years. This maneuver requires careful consideration, so work with a competent accountant who is familiar with the procedure. If you do this correctly, you may be able to avoid paying taxes on your contributions all together in some cases.

Roth IRA conversions are taxed at ordinary tax rates, so you can choose to convert part of your tax-deferred assets in years when your income is low to avoid paying a high tax rate. If you have no other income for the year, part of your conversion will even be converted to a Roth tax free. Next time your income drops, remember to look into this because it could significantly boost your nest egg.

You could pay a lower tax rate in retirement. You avoid paying the top marginal tax rate on every dollar of your contributions to a pre-tax account, but not every dollar of your withdrawals will be taxed at the top rate. Thanks to the progressive tax system, the lower range of income is taxed at a lower rate, and the tax rate moves up as your income increases. That means a portion of your withdrawals will be taxed at the lowest rate, while part of it will be taxed at a higher rate. On the other hand, contributions would have been taxed at your top rate, so don't just try to compare your tax rate during your retirement and working life to determine whether you should choose a tax-deferred account.

401(k) plans present a wealth of opportunities for advisers

By Darla Mercado

Mar 3, 2013 @ 12:01 am (Updated 7:53 pm) EST

James Yang

Retirement plans, particularly those at small businesses, are the next frontier for financial advisers — as long as they can find the best way to serve employers and their workers.

Defined-contribution plans are booming as plan sponsors abandon traditional defined-benefit pensions and shift the burden of saving for retirement onto employees. Indeed, assets in 401(k) plans hit $3.6 trillion last year, and they're expected to reach $4.8 trillion by 2017, according to Cerulli Associates Inc.

Service providers' push to encourage workers to raise their contributions to a retirement plan beyond the default 3% of salary, along with market appreciation, likely will be the big drivers of that asset growth, according to Kevin Chisholm, associate director at Cerulli.
“There's a strong desire from the plan sponsor to make sure that the participants have some education and guidance, and advisers can play a role in that, as well as help participants with their questions,” he said.

As the opportunity for advisers to enter this market grows, so too does segmentation in the retirement plan space. Advisers can provide three different levels of service to plan sponsors.

At one end of the spectrum, there is the 3(38) investment manager under the Employee Retirement Income Security Act of 1974, a designation that places full fiduciary liability on advisers and gives them discretion over assets.

In the middle, there's the ERISA 3(21) co-fiduciary, who shares fiduciary responsibilities with the plan sponsor.

And on the opposite side of the spectrum, there's the nonfiduciary broker or insurance agent, who does not handle investment selection but can help select providers and ramp up participation in the plan.


The plan sponsor ultimately has the responsibility for selecting a service provider prudently.

In a rule it plans to re-propose later this year, the Labor Department will seek to expand the scope of retirement plan professionals who must meet a fiduciary standard — a development seen as a mixed blessing for financial advisers.

For one thing, it will drive demand from plan sponsors who prefer that a fiduciary adviser pick out plan investments, choose the appropriate service providers and stay on top of DOL regulations.

“People shouldn't run from [the fiduciary designation] — they should embrace it,” said Pete Kirtland, president of ASPire Financial Services LLC, a web-based record keeper for 401(k) and 403(b) plans. “A plan sale isn't really an investment sale; it's a service sale, and now you have to serve the plan and its participants.”

Not all advisers will be able to step in as a plan fiduciary. Some are precluded from doing so because their broker-dealers limit that capability — as well as the additional resources and liability exposure — to advisers who specialize in retirement, keeping out 401(k) dabblers who have only a handful of plans.

Those who do become fiduciaries, however, have a whole slate of new issues about which to worry.

There are two distinct areas of potential liability exposure that are within the adviser's control, according to Jason C. Roberts, chief executive of the Pension Resource Institute. “You need a prudent investment process, and you must be able to demonstrate [it] with good document retention,” he said. “But the sleeper issue is prohibited transactions.”

Advisers can control some prohibited transactions, such as ensuring that they receive level compensation for the services provided to a plan (ensuring that fees don't rise drastically as assets grow). However, other so-called PTs can come around and bite the adviser, such as a failure to detect a fiduciary breach by another service provider who's working with the plan, Mr. Roberts said.

Each player providing service to the plan accounts for a portion of the overall cost. A third-party administrator handles the plan's record keeping, while an insurance company or fund manager provides the investments. In turn, a trust company, insurer or fund manager can act as a custodian of the plan assets, depending on the service arrangement — namely, whether the plan is “bundled” and serviced by one service provider, or unbundled.

Under newer models, an adviser who shares fiduciary duty with a plan sponsor as a 3(21) adviser can expect to earn 10 to 25 basis points, while an RIA acting as a 3(38) investment manager can earn 25 to 80 basis points, said Reed C. Fraasa, managing director at Highland Financial Advisors LLC. Though nonfiduciary brokers have been able to charge 50 to 100 basis points in the past, he believes these fees will come down as plan sponsors become increasingly aware of the services they're getting for that cost.

“Over time, as more plan sponsors get educated, [401(k) fiduciary] is going to be the new standard,” he said. “I don't see how brokers can justify more than 25 basis points just for putting together a package for someone and once a year meeting with employees. It's unreasonable.”


Though nonfiduciary brokers and agents can't provide investment advice to plan sponsors or handle other fiduciary duties, they still can be valuable to employers.

In these arrangements, popular among plans with less than $10 million in assets, third-party firms such as Morningstar Inc. or Mesirow Financial Holdings Inc. can handle investment management duties and act as fiduciaries, according to Mr. Chisholm. Meanwhile, the broker or agent can maintain his or her relationship with the plan by driving participation rates in the plan, educating workers and answering questions plan sponsors may have.


Mr. Roberts warns, “Don't hang your hat solely on the ability to serve in a co-fiduciary capacity. There are people out there who will prospect your plan based on their ability to provide holistic services.”

Those services include improving outcomes for workers and helping participants maximize their benefits, he said.

The ability to capture rollovers, which some 401(k) advisers view as the ultimate payoff as workers retire, depends largely on whether the adviser is a fiduciary.

Advisers acting as fiduciaries — even those who are “functional” fiduciaries and give advice on investments when they shouldn't — run the risk of triggering prohibited transactions if they try to harvest rollovers from the plans they oversee.

A 2005 advisory opinion from the DOL said if a plan fiduciary advises a participant to take a distribution and invest the money in an IRA overseen by that adviser, he or she is violating the prohibited-transaction rule. Notably, nonfiduciary reps are not held to the same restriction.
A number of major broker-dealers are able to assist advisers in understanding the nuances and can accommodate those from all three service tiers. Commonwealth Financial Network, for instance, has its “occasional” 401(k) advisers — wealth managers with a handful of plan clients — “business builders,” who have 10 to 20 plans and want to expand their book, and “specialists,” whose entire business is based on serving 401(k)s.


Those who are starting out need to understand that there is strength in numbers, said Paul Mahan, director of retirement consulting services at Commonwealth.

“I would suggest that [newcomers] team up with another practice under their broker-dealer or hire a consultant and take advantage of the broker-dealer's resources to ensure they're doing the right thing,” Mr. Mahan said. “The wealth management practice that wants to put a foothold in the 401(k) business will struggle unless they have some additional resources to get them going.”

Plan advisers need help not only with mitigating risk and ensuring their fiduciary process is sound, but also with closing new deals and coming up with employee education materials, Mr. Mahan added.

Advisers can accept rollover business from plan participants -- sometimes

By Richard F. Stolz

March 5, 2013

There is a general belief that advisers acting as fiduciaries to a 401(k) plan would violate ERISA if they advise participants on IRA rollover opportunities and wind up managing those rolled over funds. That opinion is not surprising, according to ERISA attorney Marcia S. Wagner of the Wagner Law Group. But it is not necessarily correct.

Speaking this week at the 2013 NAPA/ASPPA 401(k) summit, Wagner acknowledged that the DOL’s advisory opinion 2005-23A that addresses this subject, superficially interpreted, would give the impression that under no circumstances could an adviser do so without triggering a prohibited transaction that could disqualify the plan -- a risk that no adviser would want to take. The DOL is extremely attentive to any action that would amount to self-dealing, she noted.

But a part of that advisory opinion that is generally not examined, she said, essentially creates a blueprint for how advisers can provide that service without violating the law. The legal underpinning for part of the opinion stems from Varity v. Howe, a benefits case that reached the U.S. Supreme Court. The employer in that case tried to establish that it wasn’t liable under ERISA for egregious behavior on the part of some key employees in advising participants to pursue a course of action that executives knew would not end well for the participants. In rejecting the employer’s argument, the Court established a three-pronged test related to communication with plan participants establishing liability under ERISA that advisers can use in the rollover advice situation.

  1. The factual context of the communication -- is it in a plan-related setting (e.g.,at a meeting with plan participants at the company site)?
  2. Do the people speaking have plan-related authority?
  3. How plan-related is the nature of the communication itself?

“You want to be sure you fail all these tests,” Wagner explained.

The ruling essentially provided a way for advisers to carve out there role as fiduciaries to the plan, from other normal activities they can conduct as advisers independent of their role as plan fiduciaries.

Wagner and fellow presenter Charles D. Epstein (a plan adviser and also consultant to advisers as “The 41(k) Coach,” have created a “toolkit” that gets into the details of steps advisers need to take. But nub of the matter, they said, boils down to this: Establishing and living by a strict set of procedural guidelines. Procedures needed to satisfy the three-part test:

  1. When speaking to participants as a group, speak only about rollover-provisions of the plan document, and do not proffer any advice about the wisdom of rollovers, or how they might go about doing a rollover. Such conversations should only occur outside of the employer’s place of business, if a participant pursued personal advice on rollover options.
  2. In advance, have the plan sponsor sign a document stating that any rollover services provided by the adviser are not offered under the adviser’s authority to provide plan services.
  3. Have participants sign an acknowledgement that they understand that any rollover services are a non-plan related service.

Without all three procedures followed, the risks of proceeding are too great, Wagner said. “This area is evolving. It is important to be conservative.”