Back in the day, being an institutional consultant was cool. Retail advisor? Ha, that was crawling on your belly. Well, today, the institutional pension plan is essentially dead (or, put another way, no business is going to go out and create a new pension plan; although, old obligations must be honored). In fact, IBM—the stalwart of American Big Business—dumped the defined-benefit (pension) plan for the defined-contribution plan—the 401(k). Big Blue announced last week that it has hired Fidelity Investments and The Ayco Company (a Goldman Sachs subsidiary) to offer financial advice its U.S. employees.
That’s good news for financial advisors everywhere. It opens up a whole new world. Remember that the 401(k) plan world is underserved, with workers everywhere clueless of how to pick investments and companies (small ones, at least) unsure on how to build a defined-contribution plan. You can help, thanks to the 2006 Pension Protection Act (PPA), which says that advisors can offer personal financial advice to 401(k) plan participants—ERISA had previously scared everyone off. (The PPA amended ERISA.) The new law allows fiduciary advisors of a plan to give investment advice to 401(k) participants who are now automatically placed in the plans. In fact, employees must opt out of defined contribution plans if they choose not to participate. Otherwise, automatic deductions are made from their pay and placed in default investments.
That 127,000 IBM employees are being served by large financial-advisory firms is no surprise—as one consultant puts it, “Big companies want big firms.” Luckily for wealth managers, it’s small businesses that they should be offering retirement advice to. And there are plenty of those to go around. There are approximately 5.8 million small businesses in the U.S. that employ over half of the country’s workforce.
These small business employees are in of need advice, too, as more small businesses begin offering 401(k)s. “The advice biz within 401(k) plans is going to grow substantially,” says Chip Roame, managing principal of Tiburon, Calif.-based Tiburon Strategic Advisors. Roame says the 401(k) advisory business will be “revolutionized.” Wealth managers who have had doubts about serving 401(k) plans will now regard the plan as entryway to the rest of a participant’s assets. “If you tell him that he can serve a 401(k) plan and give advice, he will be more interested in learning about it,” he says.
And for the traditional advisor selling retirement plans to sponsors, he now has the opportunity to extend his services and actually give advice to the plans’ participants. “The roles of the traditional advisors selling 401(k) plans and wealth managers will get a lot closer,” Roame says.
But advisors who want in on the 401(k) business may want to act sooner rather than later. According to a recent PricewaterhouseCoopers survey, only 27 percent of CEOs of “fast-growth companies” say they are knowledgeable about the PPA’s guidelines. However, 80 percent of the 309 companies surveyed have already retained advisors to help manage their 401(k) plans. Fourteen percent were without an investment advisor.
Small offices with a handful of employees may be a good place to start building relationships. Law firms, doctors’ offices and consulting firms are just few small businesses to consider offering 401(k) plans and advice to, Roame says.
Still, advisors should be aware of the challenges involved in offering retirement advice to 401(k) participants. Dennis Gallant, founder of Gallant Distribution Consulting in Sherborn, Mass., says an efficient process has to be in place in order to be successful. “The huge challenge is building a cost-effective model that offers retirement advice on a scalable level.” In other words, don’t take on more than your firm can handle.
