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Defined-Contribution Specialists Face More Competition

By Chris Latham August 22, 2013

Advisors who feel daunted trying to serve a few hundred private clients might balk at targeting institutional clients seeking fiduciary guidance for hundreds, sometimes thousands, of retirement-plan participants. But that’s precisely what defined-contribution specialists, an increasingly popular specialization in the advisory space, do as a matter of course.

Some of these specialists say the size of the retirement-plan programs in question helps offset the headaches associated with such business. And while it seems that more companies are turning to retail channels like brokerages and RIAs for help with investment counseling and employee education, stringent regulatory standards force advisors and plan sponsors alike to make the plan participant’s satisfaction their primary goal.

John McAvoy, who runs Waterstone Retirement Planning in Canton, Mass., points to another barrier to entry. Though many small companies lack guidance for their employee-retirement programs, becoming an advisor to such programs “requires technical knowledge that takes years to master,” he says.

According to a recent Fidelity survey, companies switch retirement-plan advisors primarily to find one who can keep them abreast of regulatory changes and help them meet fiduciary requirements and minimize plan costs. McAvoy, whose firm

John McAvoy
manages about $70 million for 15 sponsors with 50 to 200 employees each and about $40 million for private clients, began developing these skills 20 years ago. Though continuing education takes up time, he says the effort is offset by the fact that most plan participants don’t get too involved. He figures he speaks to only a dozen of his more than 1,000 participants a month.

Meanwhile, heightened scrutiny in the wake of the financial crisis, from concerns over depleted 401(k) accounts to the chance of a universal fiduciary standard, have made employers pickier about their plan advisors, according to Kevin Morris, a spokesman at Principal Funds.

A Crowded Field

Traditionally, firms like Callan and Segal RogersCasey have dominated investment consulting in the defined-benefit arena, these names are competing with stalwarts of the retail-investing business for defined-contribution-plan assets, says Matt Sommer of Janus Capital’s retirement-strategy unit.

One of these newer players is Merrill Lynch, which launched its Defined Contribution Investment Consulting team about 18 months ago. The group already has about 50 advisors managing approximately $4 billion for 27 clients, says Tom McAuliffe, head of Merrill’s institutional consulting business.

Merrill advisors handling these accounts — most of which have 1,000 or more participants — have the option of focusing solely on retirement sponsors or juggling institutional and private clients. John Cate, a Merrill advisor in Carmel, Ind., prefers to specialize in retirement plans. “The industry is really starving for a partnership in this area,” he adds.

Cost Concerns

Advisors have to be careful to keep fees competitive. Some plans allow fees 20% to 60% over the actual cost of the services, and that’s not prudent for advisors who want to guard against pushback, says Brian Lakkides, managing director of Fiduciary Firewall, a consultancy in Waterford, Mich. Advisors do better to accept lower fees for work with plans than they do for individual clients, and let scale make up the difference, he says.

Meanwhile, competition for defined-contribution mandates has made the “request for proposals” a common opener in a game once dominated by well-connected insiders. With contracts typically lasting from three to five years, sponsors are using RFP questionnaires to gauge advisors’ service offerings and track their performance, according to Principal Funds, which just launched a website to help advisors craft RFPs for retirement-plan mandates.