The most significant wave of ERISA regulatory reform is moving into high gear, creating a tsunami of enforcement.
The regulation is a significant step toward ensuring that plan fiduciaries are provided the necessary information to assess the reasonableness of fees paid for plan services; it will also help identify any potential conflicts of interest that may affect those services. The regulation requires all providers to disclose compensation and services, and acknowledge fiduciary capacity to clients in writing. If you have 401(k) clients and earn more than a $1,000 a year, you're affected.
The Enforcer
This administration has already hired 1,000 new enforcers and plans on spending $153 million in the first year to review the regulation and to conduct compliance reviews. This wave of regulatory reform is creating a moment of reckoning for all advisors and firms.
Every brokerage house must retrench and determine how it wants to support ERISA business in relation to other business lines and how to manage any potential conflicts of interest. Maybe other business lines are so profitable that a b/d can't or doesn't want to strike a fiduciary pose. That being said, qualified business intersects with almost every other business line. If you include IRA assets, total retirement business generally represents between 50 percent to 60 percent of wirehouses' total revenue.
What level of fiduciary responsibility and risk are firms willing to take on? What levels of risk are they willing to let their advisors take on? At most wirehouses and independents, over half of the reps advise on at least one 401(k) plan, which means there are a lot of you out there who need to assess your position in this marketplace.
Although the migration from commission to fee-based business has been tremendous, and retirement producers' migration from wirehouses to independents has been stupendous, the greater percentage of 401(k) plan business remains in commissionable form where disclosure has historically not been as strong. All advisors with 401(k) plans on their books have important considerations to address. Do I want to be in this business? If so, am I at the right firm? Let's look at a couple of common scenarios.
Advisor Scenario #1 - The “Dabbler.” A large percentage of you have fewer than 10 401(k) plans on your books. You set them up as an accommodation to the owners you work with on an individual basis. You are not an “expert” nor interested in becoming one. You put the plans into a turnkey annuity-based plan or 12b-1 environment where you never really explained the fees, maybe because you didn't understand them yourself and the plans are so small or incidental to the rest of your business you haven't really been properly servicing them. Either way, fees associated with the plan aren't incidental to the business owner. Your clients are not going to be happy when they find out the fees they've been paying, or if there is an underperforming fund.
Ideally you have two options. One, your firm may create a turnkey solution or align with a third party that assumes all responsibility and you can just earn a fee for non-fiduciary services. Alternatively, now might be a good time to expand your referral network and consider “partnering” with an expert to refer these clients.
Advisor Scenario #2 - The “Part-Timer.” You have more than 10 plans on the books, 401(k) revenue has become substantial, and you enjoy working in this marketplace. You have gotten an industry designation or know you need to get one now, you consider yourself somewhat of an expert, and you want to continue to grow your practice. You face important questions. What percentage of your overall practice does retirement plan business represent? Are you going to work with plan sponsors? Participants? Both? How much revenue potential could retirements represent? How does my firm support my ability to align with ERISA clients and other business lines — wealth management, estate planning, corporate services, health and welfare insurance? Can you function as a registered rep? RIA? Both?
If you work at a firm that doesn't allow you to work in an advisory capacity and on a fully transparent fee-for-services basis, you are most likely going to be relegated to a reg rep role. You are going to be limited to providing product information on most likely a limited suite of “firm-approved” providers. You will need to ramp up and track the effectiveness of non-fiduciary services such as plan design assistance, committee management, conversion services, vendor oversight and management, and participant education. You can provide information on investments but you will not be able to provide advice.
This isn't ideal competitive positioning because, given the choice, why would a plan sponsor choose a professional with limited capabilities and scope over an advisor who can act in an unbiased, independent basis and offer a full suite of fiduciary services ranging from vendor search, fee benchmarking, IPS development, investment selection, monitoring and employee education and advice?
The answer is obvious.
Advisor Scenario #3 - The Advisor. Many successful advisors have built a successful practice around the traditional model of IPS development and fund selection and monitoring, but those who are going to compete and win will need to expand their role to include assisting with the compliance of these new disclosure regs, fiduciary oversight, assistance with committee development and protocols, IPS and investment advisory services, QDIA analysis, plan design consulting, employee education and advice, vendor oversight and management, periodic vendor review and competitive analysis and finally an annual fee analysis of all related service providers benchmarked for reasonableness.
Firms and advisors deciding to stay in the business need to adjust their model to compete and comply with the new world of transparency, and if done right, there is a sales bonanza to be had by being able to charge for services that have typically been given away. Advisors can charge for services on an integrated or a la carte basis, creating hundreds of new ways to engage with clients. One indie hybrid firm recently launched a retirement plan consulting program and within 12 months increased fee-based consulting activity by 300 percent.
The one question all advisors with 401(k) plans must answer: Are my fees reasonable? Because this is such an emerging marketplace, there are limited independent resources whose costs range from cheap (or free) to really expensive. The really expensive options are still working out kinks so you can provide this substantiation with a very simple spreadsheet on your own.
WRITER'S BIO:
Amy Glynn is president and founder of Pension Resource Institute LLC.
BENCHMARKING TOOLS
| Product Name | Provided By | Cost | Contact |
|---|---|---|---|
| ADVISOR SERVICES | |||
| 401(k) Benchmarking Survey | Deloitte | Free | www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_consulting_401(k)AnnualBenchmarkingSurvey2009_081409.pdf |
| Fee Benchmarker-Advisor Almanac | Ann Schleck & Company | $ | http://annschleck.com |
| “Fees, Plan Design, and Participant Success Measures; Plan and Participant Services Report” | Fiduciary Benchmarks | $ | www.fiduciarybenchmarks.com |
| PLAN EXPENSES | |||
| 401(k) Average Book | 401(k) Source | $ | www.401ksource.com |
| DC Plan Analyzer | InvescoAim | Free | www.invescoaim.com |
| BrightScope | Brightscope, Inc. | $ | www.brightscope.com |
| Fees, Plan Design, and Participant Success Measures | Fiduciary Benchmarks | $ | www.fiduciarybenchmarks.com |
| Plan Tools Expense Analysis and Benchmarking | FRA Plan Tools | $ | www.fraplantools.com |
| PLAN, DESIGN, SERVICES & PARTICIPANT RESULTS | |||
| 401(k) Benchmarking Survey | Deloitte | Free | www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_consulting_401(k)AnnualBenchmarkingSurvey2009_081409.pdf |
| BrightScope | Brightscope, Inc. | $ | www.brightscope.com |
| EBRI/ICI 401(k) Asset Allocation, Account Balances, and Loan Activity report | Employee Benefits Research Institute | Free | www.ebri.org/pdf/briefspdf/EBRI_IB_12a-2008.pdf |
| “Fees, Plan Design, and Participant Success Measures; Plan and Participant Services Report; Retirement Readiness Index“ | Fiduciary Benchmarks | $ | www.fiduciarybenchmarks.com |
| PSCA Annual Survey of Profit Sharing and 401(k) | Plans Profit Sharing/401(k) Council of America | $ | www.psca.org/PurchaseProducts/tabid/114/Default.aspx |
| The 2010 Retirement Confidence Survey | Employee Benefits Research Institute | Free | www.ebri.org/pdf/briefspdf/EBRI_IB_03-2010_ No340_RCS.pdf |
| VENDOR COMPARISONS | |||
| Pathfinder | Plan Sponsor | $ | www.plansponsor.com |