Opportunity Knocks

By Daniel J. McGee CRPS is a Vice President for Business Development - Retirement Services with the Principal Financial Group. Dan is active in working within the consultant, TPA, RIA, wirehouse and independent broker/dealer channels. You may contact Dan at mcgee.dan@principal.com.

While the mutual fund issues of late trading and market timing caused a bit of industry discussion and lead many plan sponsors to review their plans, not much has substantively changed regarding the 401k landscape. In addition, the market declines of 2000 - 2002 lead to a brief marketplace "pause," but still much is the same on the investment front.

With all of this "noise," there is opportunity. Specifically, opportunity for the retirement plan advisor. Many plan sponsors lack direction and confidence when it comes to their retirement plan(s). While the issues of the recent past have caused a heightened sense of plan sponsor fiduciary responsibilities, many employers still lack the processes necessary to deal with those responsibilities. Advisors can play a key role in helping employers understand and deal with these obligations. Participants can't make good decisions unless plan sponsors do. The advisor that takes a systemic approach to the implementation and maintenance of a clients plan(s) has an excellent opportunity to differentiate themselves in their local markets. In addition, the advisor that takes a slightly unorthodox approach to their ongoing plan services can further engender client loyalty, thus leading to local recognition and referrals.

What are some key ways to differentiate? How can advisors help their employer clients deal with fiduciary concerns and responsibilities? Consider the following:

1. Analysis of Needs - Many times an employer has a sense that something is wrong with their current plan. They have an intuition that the plan could be improved. So often, the advisor assisting the employer stops at the employer's diagnosis. A comprehensive benchmark of the current plan can diagnose all potential areas for improvement and will no doubt provide for more precision in the RFP/vendor analysis stage. The advisor can help the employer understand where the improvement opportunities are. More times than not, it's not just expenses or investment line up or lack of a communication strategy. An advisor can "open an employers eyes" when they show an illustration of how the current plan compares to industry averages. This is not only taking a comprehensive and consultative approach, it's a differentiator.

2. Investment Line-up - Many advisors focus their value add through investment selection assistance and ongoing fund monitoring. While this is without question a valuable service, there is an opportunity for advisors to do more, to take it to the next level. What about an evaluation of plan performance vs. fund performance? How has the plan performed? What risk has the plan taken for the 3 or 5-year return received? How have the individual funds been utilized by participants in constructing portfolios? What if one thought about the plan like an average participant? What is the plan's asset allocation? I'm not discounting the need to continue to ensure the plan is offering good funds and funds appropriate for retirement plan participants. What I am suggesting is there is an opportunity to take it to the next level of evaluation, to be distinct from the "rest of the pack." In addition, how often are the retail funds typically made available truly evaluated for (retirement plan) appropriateness? Fund cost, its turnover percentage, its allocation to cash, is it true to the fund prospectus overview? All important evaluation points for retirement plan investments. Many plan sponsors don't have the time or expertise internally to evaluate this additional level of detail. They stop their evaluation at a review of past performance. They may decide to terminate a 1 or 3 year poor performer or fail to terminate a poor performing fund all together and simply add the most recent ("hot") 5 star fund. The retirement plan advisor has the opportunity to take the investment discussion to a higher level. Think about the 401k plan as an institutional defined benefit plan. Evaluate individual fund portfolios in detail, their cost, transparency, etc. Leverage the institutional services (manager selection) many plan providers make available and customize those services to the client. Focus on plan performance in addition to individual fund performance.

3. Expense Analysis - Retirement plan expenses and the discussion of plan expenses have received a lot of press in the last few years. In an environment of poor investment performance there is a heightened interest in what the plan (most often the participants) is paying. My recommendation to the retirement plan advisor is to get the client to think beyond just bottom-line cost. The real evaluation point is value. What value, what services are being offered for the cost being presented? What is being committed by the plan provider in terms of ongoing technology spent across their business? What is the investment in human resources across the plan provider's organization, resources dedicated to the delivery of retirement plan services? Explicit and total expenses are very important. Expenses need to be competitive, however, I believe there is an opportunity for advisors helping plan sponsors to broaden the evaluation points and consider overall value. Consider the intangibles when evaluating overall plan cost.

4. Participant Education - Clearly over the last couple of years, employee education/communication has become one of, if not the, key evaluation point for employers, advisors and consultants. As baby boomers near retirement and with recent stock market declines, more and more employees want (and expect) help. One only needs to look at the increased popularity of "lifestyle" funds to become aware of this fact. The opportunity for the retirement plan advisor is to evolve their service delivery to incorporate participant services more broadly. The hardest aspect of this is to be able to do it profitably. I believe it can be done through partnership with the client and the plan provider(s). The 1st key for all employees is to set up an asset allocation strategy that is consistent with their risk tolerance and their time horizon. The 2nd key is maintaining the discipline to stick with that strategy. In incorporating some of the comments from #2 above, this can be accomplished efficiently. First, every 401k plan should have lifestyle funds, either time based or risk based. In addition, time needs to be given to be sure all employees understand this option and do not simply include it as part of their allocation to other funds. To me, this strategy is an all or nothing proposition and should be explained as such. For employees who want to create their own asset allocation, the importance of diversification and discipline need to discussed. Differentiation opportunity…"Education Policy Statement." A document provided to the client from the advisor outlining the approach to plan/participant education, including; frequency of meetings, content of potential seminars and tools used to implement and maintain an education continuum. Remember DOL Interpretive Bulletin 96-1, assistance with asset allocation models does not constitute investment advice. Leverage that guidance.

5. Broaden Solution Set - Many advisors have decided the 401k market is a bright growth opportunity and have therefore added 401k to their services. However, not as many have embraced other unique markets. For example, many small - medium businesses are currently evaluating their defined benefit plan due to market conditions. Many employers are considering bundling their DB plan's service providers and quite likely bundling with their DC plan provider. Many employers have issues with the highly compensated employees and their ability to save what they would like. There are tremendous opportunities within the non-qualified market and it's a natural extension to the qualified plan. Finally, fantastic opportunities exist within the ESOP space. Not only in helping employers with their current ESOP (a potential way in the door), but also in evaluating prospects to potentially recommend ESOP as a solution. The 401k market is very competitive. The ideas outlined above can help advisors more effectively compete for traditional 401k plans; embracing broader retirement related solutions would also help differentiate retirement plan advisors and therefore, take out the competition just looking for and stopping at the 401k.

The retirement plan advisor is in a great position to assist plan sponsors in the maintenance of their retirement plans. Employers and their employees need this help now more than ever. Many advisors see this market as a growth opportunity. Now is a wonderful time for advisors to evaluate and evolve their services. I believe retirement plan advisors are critical in helping 401k plans be successful (vs. just popular) and helping employees obtain a secure retirement. Advisors are crucial in service delivery, they are in a position to seize the moment before them and differentiate themselves in their local markets....TAKE IT TO THE NEXT LEVEL. Opportunity is knocking, answer the door.

Other articles by Daniel McGee: Approach Your Retirement Plan Like You Approach Your Business and Five "Best Practices" for Employer Retirement Plans.

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