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Opinion

Retirement Market's Curveballs for Advisors

October 27, 2016

In today’s highly competitive financial services arena, it certainly can be tempting for advisors to strive to be all things to all people. For instance, an advisor who has a corporate executive client may be offered the chance to advise the company’s 401(k) plan. It could be difficult not to jump at the opportunity, but there is a host of good reasons to take pause.

For starters, the 401(k) business is complex. It takes significant expertise and scalability to be successful: the regulatory and compliance requirements are cumbersome, and plan participants are increasingly demanding and litigious. In short, it’s not the sort of business to dabble in. The stakes are simply too high.

Many plan sponsors today will accept nothing less than an advisor who can bring not only expertise, but also a proven track record in creating effective plan design, managing fiduciary responsibilities, improving plan performance, and ensuring ongoing plan oversight and compliance.

Effective plan design

An experienced 401(k) plan advisor will begin with an assessment of the demographics of the employee base and addressing the plan sponsor’s specific goals for the plan. For example, if one of the primary objectives is to reward and retain key employees, plan provisions such as safe harbor matching formulas, profit sharing and accelerated vesting should be established.

From there, the most important elements of effective plan design are features that will move the dial on employee enrollment and savings rates. In that regard, automatic investing processes will have the greatest impact. These include: automatically enrolling employees as soon as they are eligible at a level that takes full advantage of employer matching; transferring employees into a Qualified Default Investment Account (QDIA) to protect them from poor investment decisions; and annual escalation in salary deferral percentages to maximize savings — all with written notification and ample chance to opt out.

Managing fiduciary responsibilities

One of the primary concerns for plan sponsors is the fiduciary risk they face. Even when they hire an independent advisor, plan sponsors are still required to act solely in the best interests of the plan participants, which means acting in a prudent manner, diversifying the plan’s investments, and ensuring that the plan expenses are reasonable. This can be a daunting burden to bear alone.

That’s why an increasing number of plan sponsors will only consider an advisor that is willing to step up and share in the risks as a co-fiduciary. And for an advisor vetting potential outsource partners, the benefit of an advisor who will assume the responsibility for selecting, monitoring and replacing investment choices while meticulously documenting all plan changes is undeniable.

Improving plan performance

401(k) plans are only as good as the employee acceptance and participation they engender. To that end, the employee education process is crucial and one of the key differentiators for advisors that have been successful in the retirement plan business.

A comprehensive educational program will include group educational forums as well as individual retirement readiness assessments and discussions of optimal asset allocation and investment choices. Clearly, this is an effort that is both costly and time-consuming and one area in particular in which an advisor without experience would have a great deal of difficulty.

For plan sponsors, the benefit of a well-performing plan is not only the value of helping employees prepare for retirement, but also a means of circumventing the costs of having an aging workforce that is unprepared for retirement.

Ongoing plan oversight

Another key issue for plan sponsors is ensuring that the plan is compliant. It’s more than just a matter of establishing plan parameters that meet IRS, DOL and ERISA standards — it’s also ensuring that the plan fastidiously adheres to plan documents while addressing legislative and regulatory changes as they occur. This is where it is vital to partner with an advisory firm that can assist in every step of the way from plan design to superior back-office service capabilities.

Advisors should think very carefully before entering the 401(k) business — it’s complex and risky and often cost prohibitive. But a solution that includes partnering with an advisory firm that offers the scale and experience they lack and enables them to leverage their contacts and solidify their client relationships is certainly worth considering.

Fortunately, there is a solution. For advisors who’d like to cultivate new sources of revenue but lack the expertise to go it alone in the 401(k) realm, partnering with a firm that specializes in the retirement plan market can be an appealing option. But before heading out to begin vetting potential outsource partners, it’s important to understand the nuances of the industry today and the heightened standards of what is expected from advisors.