Corrective distributions are a headache for plan administrators, but they also represent an opportunity for 401(k) advisors who are prospecting for new business. Advisors can present themselves as better alternatives to a current administrator and offer solutions that will help a plan sponsor avoid costly errors in the future.
We downloaded the U.S. Department of Labor’s latest Form 5500 datasets (CY 2021) and kept those 401(k) plans that have more than $1 million in total assets, filed a Schedule H and began the plan year in Q1. The resulting 56,617 401(k) plans contained $653 million issued in corrective distributions. This represents mistakes like employee contributions over their legal limits or plans that fail nondiscrimination tests. In other words, more than half a billion in mismanaged money!
As an advisor on the hunt for new prospects, you could start by examining the industry groups that are most prone to corrective distributions. Plan data analysis through BenchMine reveals five of the industry groups with the highest average corrective distributions:
- Metal ore mining ($240,048)
- Automotive equipment rental and leasing ($208,500)
- Clothing stores ($103,504)
- Drugs and druggists’ sundries merchant wholesalers ($96,384)
- Sugar and confectionery product manufacturing ($92,153)
Of course, these are averages. This is not to say the auto rental center or the iron mine down the street is struggling with corrective distributions. But it’s one place to start. Another could be a geographic search that ranks the highest corrective distributions within 50 miles of an advisor’s office, uncovering motivating facts like “… has the 11th-highest corrective distributions ($161,922) of the 18,285 plans that are self-administered by the plan sponsor and have 100 to 499 total participants. Those $161,922 compare to an average of $4,089 across the 18,285 plans.”
And while ranked lists may be a useful starting point for prospecting, advisors can reap additional insights with deeper, comparative analysis. An advisor might impress a prospect even more if they are able to say, “I looked at every self-administered plan sponsor of your asset size and similar number of participants, and your corrective distributions are much higher. Maybe I can help you.”
Once advisors have discovered a prospect, they can build a strategy around demonstrating their strengths in plan design and administration. A thorough review of a plan sponsor's current setup will uncover areas that may be susceptible to errors, such as contribution limits, vesting schedules and nondiscrimination testing. One could suggest solutions that will help the sponsor avoid mistakes and the need for corrective distributions.
Focusing on regulatory compliance is an effective approach to engage would-be clients who struggle with corrective distribution. They are likely to appreciate advisors who show they can mitigate the risk of costly penalties and fines. Advisors who stay abreast of regulatory news and trends will have a better chance to connect the dots between their compliance knowledge and services that will keep a sponsor in good standing with government agencies and other stakeholders.
And finally, one should not overlook the value of better customer service. A sponsor will often be open to switching to another advisor who can offer them more personalized attention. By committing to regular plan reviews and proactive communication, with the help of the latest and best technology tools, advisors demonstrate they are invested in a sponsor’s success, and will be there to support them at each step.
Analysis of big-picture data around corrective distributions can reveal plan sponsors who might be sources of growth in a way that traditional prospecting methods might overlook. Once an advisor knows who to talk to, it all comes down to showing a solid grasp of the pain points that lead to costly distributions … and how to avoid them.
Raul Valdes-Perez is the CEO and co-founder of OnlyBoth Inc., provider of BenchMine.
