Practice Management

New 401(k) advisers need to think big

With the squeeze on fees, only advisers with a large volume of business will make money

Oct 27, 2013 @ 12:01 am

By Mark Schoeff Jr.

For investment advisers seeking to enter the 401(k) business, Gary Josephs' advice is to go big or go home.

Mr. Josephs, 55, an Irvine, Calif.-based principal at Retirement Benefits Group, has been advising 401(k) plans for 24 years, giving him a perspective that stretches back almost to the advent of the investment products. What he's seeing today is a market under pressure to reduce fees.

His firm stays profitable in part by finding big clients and holding on to them through services provided by RBG's 50 advisers. The company, headquartered in San Diego and formed in 2009 through the merger of four large advisory firms in Southern California, is a consultant to more than 350 corporations with assets of more than $10 billion. RBG increased its size recently by picking up five clients in the Irvine area with more than $400 million in assets each.

“If you're a one-person shop ... it's going to become more and more difficult for the individual to be competitive in this environment,” Mr. Josephs said. “In order to be profitable, you have to have scale.”

He sees this trend continuing, putting pressure on smaller advisers.


When 401(k)s were introduced, the market was dominated by brokers, who could charge a fee for putting assets into a plan and then assess a trailing fee, as well. Mr. Josephs believes that those days are over.

“The exorbitant fees I've seen in the past are not going to be there going forward,” he said. “The [broker] end of the market is being pushed away. In five to 10 years, I see much more of a consolidation. It's going to be almost all advisers, very little brokerage.”

Today, fiduciary advisers have taken over the lion's share of the market, charging flat fees or fees based on assets under management. They're trying to satisfy plan sponsors who are demanding cost reductions.


“The fear I have right now is that fees are getting so compressed, it's becoming difficult to provide the level of service the client wants,” Mr. Josephs said.

Clients are putting the squeeze on fees by comparing the rates at which investment advisers deliver their services against others in the market.

“As more and more plans are benchmarked ... you're going to have to substantiate that [fee] difference,” Mr. Josephs said.

The services his firm provides include selecting and monitoring investments, as well as plan management. It also implements policies, procedures and processes for signing up employees — with a growing emphasis on auto-enrollment and auto-escalation to maximize 401(k) buildup.

Mr. Josephs said his firm meets with plan sponsors at least two times a year and sometimes up to four times. It also spends a lot of time interacting with employees, both electronically through e-mail and online seminars, and with on-site sessions.

With an increasing emphasis on cost containment, advisers have to show they're adding value, even in areas such as investment consulting, which on the surface can seem routine.

“The delivery [of market information] is commoditized,” Mr. Josephs said. “Your expertise, your analysis, how you delve into that information, is not a commodity.”


The theme Mr. Josephs stresses when talking to clients and potential clients, is that they're getting something from the Retirement Benefits Group that they won't find elsewhere — an advantage that is worth, say, 5 more basis points than what their competitors charge.

“It takes a lot of expertise to manage these plans effectively,” Mr. Josephs said.

It also requires fiduciary duty to the plan sponsor — another dimension that has to be factored into pricing.

The company doesn't necessarily tack on a fee for fiduciary management, but it calculates whether it can service a plan at a certain fee level while taking on fiduciary liability. Maintaining fiduciary duty puts a premium, among other things, on document retention. Mr. Josephs' firm has developed a Fiduciary Vault tool that operates in a cloud environment.

Fiduciary duty can be a selling point to attract business.

“Ultimately, [clients] want somebody who provides fiduciary oversight, quality services and delivers on promises,” he said.

An adviser to 401(k) plans has to handle clients of all sizes consistently, which, again, makes heft an asset, according to Mr. Josephs.

“I provide the same services to a $2 million plan that I provide to a $100 million plan,” he said. “If we start to differentiate our service models to corporations, we're going to lose the synergies of what we do.”


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