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AdvisorNews - October 2014

Brokers begin to break into the 401(k) market

By Paula Aven Gladych
December 27, 2013 • Reprints
As defined benefit plans continue to disappear, more American workers are relying on defined contribution plans, like 401(k)s, to save for retirement. And because the defined contribution market is booming, many advisors and benefits brokers who’ve never worked with retirement plans would like to break into this market. They just don’t know where to start.

“It is a complicated world,” says Phil Chisholm, vice president of defined contribution product management for Fidelity. “It’s difficult for an advisor to step in and say, ‘Today I’m going to be a 401(k) advisor.’”

That’s why he advocates that anyone interested in working with 401(k)s start by aligning themselves with someone who’s already successful in that environment. If the advisor’s an expert on investments, she could team up with someone who complements her skills, like someone who specializes in plan design or education.

It helps build knowledge and gives individuals a better understanding of the elements that go into 401(k) sales and service, Chisholm says.
He also recommends that anyone interested in becoming a 401(k) plan advisor should get out there and learn as much as they can about the retirement business. That means acquiring industry designations, joining local groups, taking college courses on financial planning (with a retirement focus) and taking advantage of educational offerings from industry groups such as the American Society of Pension Professionals and Actuaries and the College of Financial Planning.

“The more networking abilities they build and the more confidence they have in their own abilities the better level of support they can give plan sponsors,” Chisholm says.

Financial advisors also should build strong relationships with individuals outside of the industry as much as possible, like CPAs, insurance brokers, auditors and local chambers of commerce, he says. They also should cater to industries in which they are personally knowledgeable and focus on those types of businesses in regions where they want to do business.

Brokers who have never worked in the 401(k) market should start their journey with smaller plans or startups. Those are the “types of organizations that are going to be elementary in their needs, so advisors can build knowledge by focusing from the ground up,” Chisholm says. A novice wouldn’t even know where to begin if a $100 million plan dropped in their laps.

The world has evolved quite a bit in the past decade, he says. It’s very difficult to be an advisor who sells one or two plans and can service them appropriately. Fee disclosure and compliance regulations have made it very difficult to be in the defined contribution marketplace, he says. It requires some level of specialization.

Jason Grantz, an institutional consultant with Lexington, Ky.-based Unified Trust Retirement Plan Consulting Group, says there’s a big gap between the advisors who are real experts in qualified plans and newer advisors who are just learning the business while trying to attract clients.

He says that working with those who already have expertise in the 401(k) space is a good way to learn the business. Then they are splitting accounts instead of competing against each other for that business, Grantz explains.

Many new regulations have come into play during the past few years and more are on the way, including changes to the Securities and Exchange Commission’s and Department of Labor’s fiduciary standards.

“I do think it is a very specialized area of the broader financial marketplace, a poorly understood one in aggregate,” Grantz says. “Even in the circles I travel in, retirement plan professionals, there’s a spread between those who are elite and those who are just simply knowledgeable about providing service.”

There are two models out there advisors use for their business. Some want to be the best in the qualified plan space. Others operate on a more general contractor model where they work with other skilled people and bring them in as needed. Both models work very well, Grantz says.

The Online 401(k), for example, deals with numerous advisors who haven’t worked with a lot of 401(k) plans in the past.

“They say, ‘I don’t understand any of this. Make it easy for me. This is new for me. I don’t want to misstep. I don’t want to commit to work that is not profitable for me,’” says Craig Howell, director of business development at The Online 401(k).

“We’re one of a few vendors who are not interested in working with experts. We spend a lot of time helping advisors figure out if they want to be in the industry,” he says.

“Organizations like mine, because we service that small business segment, we are highly packaged. An advisor doesn’t need to do much of anything,” Howell adds.

If advisors move up market they need to be more sophisticated. The small plan market is a good place to start, he says.

Howell asks individuals who approach his company if they want to be a 401(k) expert or if they want to aggressively pursue the 401(k) business. He also asks if they would rather work closely with employees rather than have ERISA expertise. Once they determine why they are doing it, he presents them with a series of questions about which services they want to provide:

  • Do you want to be an investment fiduciary? He points out that becoming a fiduciary is a big responsibility and has many liabilities. “It is not for everybody, in fact, for very few,” Howell says.
  • Do you want to have an understanding of plan design? This also requires expertise and training, he said, but there aren’t as many liabilities as when working with investments.
  • Do you want to educate employees and get in front of them to offer additional services?
  • Do I not want any of that? Am I doing this as an accommodation? Howell points out that some investment professionals get involved in the 401(k) business not because they want to but because they need to.
  • Do I want to help with a vendor search and make sure they have benchmarking available?

Once advisors have asked themselves these questions, it’s time for them to do their homework.

There’s a multitude of training opportunities available in the marketplace to help advisors specialize in plan design, fiduciary responsibilities and employee education. Plenty of vendors can provide training on those elements, but few do all of those components, Howell says.

Prospective 401(k) advisors also need to ask themselves if they’re charging the correct fees for the services they’re offering.

“The regulatory environment is much more stringent over the past five years than it was in the late ’90s,” he says. “In this instance, the industry was taking advantage and the regulators stepped in to clean that up a little bit, and they have.”

Howell adds that the industry made its bed. If they had been transparent about their fees, “they probably wouldn’t have regulators sitting over their shoulder the way they do now.”

The greatest opportunity right now in the 401(k) marketplace is servicing smaller plans or startups, Chisholm says. He encourages advisors to team up with companies like Fidelity that serve plans of all sizes.

“We take a lot of the complexity out of the process. We have trustee services, administration and recordkeeping and a suite of mutual funds offered on our platform,” Chisholm says.

The average 401(k) plan that comes to Fidelity is around $4 million to $5 million in assets. Twenty-seven percent of the plans serviced by Fidelity are advisor-sold.

“There’s a glaring need at the lower end, the emerging company size plan. They don’t have the infrastructure or the knowledge to run their own retirement plan,” Chisholm says.

Unified Trust’s Grantz believes there are two primary skills every successful retirement plan advisor has: They are very effective leaders who can impact peoples’ attitudes and behaviors in the way charismatic leaders have the ability to do and every one of them is an effective communicator.

“Communication in very complex topics is extremely difficult,” Grantz says. Effective plan advisors need to be able to communicate to retirement plan committees and plan participants about very technical topics and get them to understand what is being presented to them.
Unfortunately, small companies don’t have a lot of resources, so the primary person running a company retirement plan is usually the same person managing its health care benefits and human resources duties.

Retirement plans usually take a back seat to health care so it takes a special kind of person to get the retirement plan committee to “pay attention to the plan and take their role seriously and professionally and to, over time, teach and coach them to be prudent experts, which ERISA requires them to be,” Grantz says.

Finra warns against conflicts in retirement-plan rollovers

Pitch for IRA money must give 'fair and balanced' information about other options, regulator says

By Mark Schoeff Jr.
Dec 30, 2013 @ 4:32 pm (Updated 8:48 pm) EST

Finra signaled on Monday that it will crack down on potential conflicts of interest that could affect brokers when they roll over a client's company retirement plan into an individual retirement account.

In a regulatory notice, the Financial Industry Regulatory Authority Inc. warned member firms that they should not recommend that a client who is leaving a company transfer money from the company's 401(k) plan into an IRA if it's better for the client to leave the money in the company plan, or transfer it to his or her new employer's plan.

Brokerage firms have an economic incentive to roll over retirement assets into IRAs that are sold by the brokers, Finra said. Rollover work — as well as the marketing of IRA services — involves securities transactions subject to Finra rules.

“Any recommendation to sell, purchase or hold securities must be suitable for the customer and the information that investors receive must be fair, balanced and not misleading,” the Finra regulatory notice stated. “Firms should emphasize that performance of the suitability responsibilities of a broker-dealer or registered representatives should never be compromised by their financial interest in recommending an IRA rollover or another action.”

The notice underscores Finra's role in rollover policing, an increasingly popular area of regulation, as more and more workers build their retirement nest eggs through 401(k) plans and IRAs. IRAs account for about $5.4 trillion of the $19.5 trillion retirement-asset market at the end of 2012, according to the Investment Company Institute.

The Department of Labor is poised to re-propose a rule next August that would apply a fiduciary duty to a wider array of advisers to retirement accounts, including brokers who sell IRAs. Observers expect the rule to address rollovers.

Finra told brokerages they must ensure that they're training their registered representatives to understand the tax, fee and investment implications of a rollover and to determine whether it fits their client's financial needs and objectives.

Brokers must be careful in how they pitch IRAs, according to Finra.

“Whether in written sales material or an oral marketing campaign, it would be false and misleading to imply that a retiree's only choice, or only sound choice, is to roll over her plan assets to an IRA sponsored by the broker-dealer,” the Finra regulatory notice states. “The marketing of the IRA rollover services offered by the broker-dealer must be balanced by a discussion of other available options and how they compare to the IRA offered, particularly with regard to fees.”

Finra told brokers that provide educational information to 401(k) plan participants to monitor those activities to make sure that they don't cross the line into IRA sales recommendations.

7 services to expect from your 401(k) investment adviser

It's annual review time. That part of year when your 401(k) plan investment advisor visits to discuss what has happened in the markets and your plan during the prior year. As you consider the success of your annual review meeting, you may wish to evaluate the services you should be receiving from your investment adviser:

Investment option performance review. This is the core set of services you are paying for. Quarterly performance reviews with reports you can understand are pretty standard. You don't have to meet quarterly, but it is reasonable to expect that you receive reports each quarter.
New investment option searches. Every now and then it will be necessary to replace an investment option in your menu. Your investment adviser should provide you with alternatives and the reports necessary to help you make a replacement decision. He/she should also guide you through a sound, fiduciary compliant, decision-making process.

Fiduciary compliance consulting - the IPS and more. Each year your investment adviser should take a look at your Investment Policy Statement (IPS) to ensure it is up-to-date. In addition, he/she should help you with 404(c) and QDIA compliance, plan document and records retention issues and vendor monitoring and oversight.

Help with employee education and communication. Most investment advisers lead the annual employee education sessions for their clients. They also are able to review any employee communications for you that impact the retirement plan.

Plan benchmarking assistance. Your investment advisor should be able to facilitate the production of a benchmarking report for your plan periodically - free of charge.

Plan design consulting. It is reasonable to expect that your investment adviser be able to review with you the suitability of the plan design changes that leading edge 401(k) plans are adopting.

Vendor management and evaluation. You are not familiar with the services/costs that your recordkeeper, trustee and custodian should be providing/charging. However, your investment adviser should be. He/she should be able to put your vendor services and fees into perspective for you.

Hopefully you will find that your investment adviser is checking all of these boxes for your plan.

IRA Rollovers: A Checklist for Documenting the Discussion

Regulators are clear: Advisors recommending rollover of employer retirement plan assets must provide clients with advice that is fair, balanced, and not misleading regarding their options for these funds.

Helen Modly, CFP, ChFC, 02/20/2014

For once the SEC, FINRA, and the Department of Labor (DOL) are speaking with the same voice when it comes to the recommendation that clients transfer funds out of employer-sponsored retirement plans upon changing jobs or retirement. These regulators are concerned that clients are being encouraged to transfer funds out of these plans without fully understanding the advantages and disadvantages of their choices.

Employer-sponsored retirement plans and IRAs can differ significantly in the investment options and investor services available, fees and expenses, withdrawal options, required minimum distribution requirements, and tax treatment of withdrawals. The unique financial needs, personal situation, and client's desire for personalized services must be evaluated before an informed decision can be made. Because the decision to transfer funds out of an employer's plan is irrevocable, advisors must adopt practices and procedures to ensure that clients are receiving the most appropriate advice for their situation.

Age Matters
If a client is between age 55 and 59 1/2, it is important for them to realize that most employer plans will allow penalty-free withdrawals, while traditional IRA withdrawals during this period are usually subject to the 10% early withdrawal penalty. Clients that are still employed after age 70 1/2 can usually postpone taking their required minimum distributions (RMD) from their employer's plan until they terminate employment, while there is no such provision for delaying the RMD from an IRA.

This can be especially important for retirement plan balances that are part of a divorce settlement to a spouse or an inherited retirement plan. If the spouse is under age 59 1/2, she should probably leave the funds in the employer plan if there is any chance she will need them before she reaches age 59 1/2. For spouses under age 59 1/2 who are inheriting employer retirement plan balances, they can preserve penalty-free access by leaving the balance with the employer (if allowed) or rolling over to an inherited IRA and taking the RMD as an inheritor until they reach age 59 1/2. After 59 1/2, the spouse can convert the inherited IRA to a spousal IRA and postpone any future RMDs until age 70 1/2.

Unique Investment Options
The availability of additional investment options is the classic premise for transferring plan balances into IRAs. Advisors must consider if any unique investment options exist in the employer's plan, such as the G fund in the Federal Thrift Savings Plan (TSP) and Guaranteed Investment Contracts (GIC) in some plans. These options often provide a guarantee against loss of value that may not be available in IRA options.

Fees and Expenses Always Matter
In the past it has been extremely difficult for a participant in an employer-sponsored retirement plan to determine exactly what fees and expenses they are paying. The DOL has made great strides to rectify this by forcing increased disclosure and transparency upon the providers of these plans.

Investors trying to compare fees and expenses still experience challenges in identifying the fees and expenses associated with retail investment options, especially where deferred annuities are concerned. It is important to realize that there may be significant differences in the level of personalized advice and ongoing investment management services between employer plans and other options. Ideally, clients considering rolling employer-plan balances to any investment option you recommend should be able to identify the cost of the investment itself as well as the cost of the services you propose to provide.

Tax Implications
Advisors must be aware of the tax status of funds in any employer's plan. If plan balances contain after-tax contributions it may be possible to roll these funds directly into a Roth IRA with no tax consequences. If there is employer stock in the plan with a low basis, then utilizing a distribution strategy that takes advantage of Net Unrealized Appreciation (NUA) may be very advantageous and will be forfeited if a traditional rollover to an IRA is done.

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Four myths about small businesses and benefits

By Donato Monaco
January 22, 2013 • Reprints

Industry research shows there’s a big opportunity for benefits brokers and agents who work with small business owners.
I want to dispel four myths that might be keeping you from taking advantage of this opportunity.

Myth No. 1: Small business owners aren’t interested in offering benefits.
Small business owners treat their employees like family, according to The Hartford’s 2012 Small Business Success Study. Six out of 10 small business owners offer their employees some form of benefits. In fact, 6.5 percent of all small firms said they will add a benefit within the next two years, while another 8 percent “possibly” will add a benefit, according to LIMRA’s 2012 Small World Trends in the U.S. Small Business Market Report.

Myth No. 2: Small business owners plan to cut benefits in order to lower costs.
Small business owners are trying their best to protect their employees even in these challenging and uncertain economic times, according to The Hartford’s second annual study of small business owners. Only 17 percent of small business owners said they expect to reduce employee benefits.

Myth No. 3: A company that’s relatively new or “young” won’t provide benefits.

Interestingly enough, “younger” companies are more likely than older firms to add a benefit. LIMRA found 14 percent of small businesses that are one to nine years old anticipate adding benefits compared to 2 percent of firms that were more than 20 years old.

Myth No. 4: Small business owners have already discussed benefits with an agent/broker.
Think small business owners have already discussed benefits plans with an insurance professional? Think again. LIMRA research found only half of small business owners have been contacted by an agent or broker within in the past year.

Your opportunity

You can help small business owners protect their employees from the impact of an unexpected illness or off-the-job injury.

LIMRA’s research shows there are opportunities with small businesses that are owned by women and minorities. Women own 24 percent of small businesses, and those numbers have been steadily growing. LIMRA’s small business report says this is an “under-penetrated market.” Another fast-growing segment of the marketplace is businesses owned by minorities, which are growing at twice the rate of all other businesses, according to LIMRA. Minority small business owners are also more likely to add group or retirement benefits in next two years, LIMRA’s research showed.

After you’ve decided which clients to reach out to, review their benefits packages so that you can identify any gaps in the coverage. You can also help determine what plan designs and benefit levels are most appropriate.

LIMRA’s report showed short- and long-term disability, as well as life insurance are among the top benefits that small business owners said they are thinking about adding to their benefits package.

When talking about coverage, it’s helpful to discuss what the average small business owner offers in order to attract and retain quality talent. You can also present funding options. For example, voluntary, or employee-paid benefits, can be a more affordable option for business owners to offer benefits without adding to their business expenses.

In fact, 77 percent of companies with 10 or more employees offer at least one voluntary product, according to the 2012 MarketVision™—The Employer Viewpoint after PPACA report by Eastbridge.

Hopefully with these myth-busters and action steps in mind, you can help build your business while helping your clients build theirs.