Retirement

Finding niche in 401(k) consulting

While target marketing usually means targeting a specific audience, sometimes a product target also can bring success.

While target marketing usually means targeting a specific audience, sometimes a product target also can bring success. One adviser who has prospered with this approach is Steven Kaye, president of American Economic Planning Group in Watchung, N.J., who targets 401(k) plans.

“There is a fantastic need for fiduciaries in this marketplace, because the needs of the plan sponsors are diametrically opposed to the needs of the 401(k) vendors,” he said. “The vendors want as much revenue with as little servicing as possible, while sponsors need just the opposite.”

Mr. Kaye approaches the market in two ways: as an investment fiduciary and as a 401(k) consultant. As a fiduciary he keeps the investment policy statement current and recommends the funds and shares classes that should be offered.

As a 401(k) consultant, he makes sure the plan vendor stays on top of things.

“The vendor is not always concerned with the investment policy statement, the makeup of the investment committee and the committee meeting notes,” Mr. Kaye said.

Because he finds that smaller plans are less likely to be kept current, Mr. Kaye adds target and life cycle funds where appropriate, as well as service features such as automatic enrollment. He also reviews the employee education materials that vendors provide, and may augment them.

Mr. Kaye started his wealth management firm 23 years ago, working from a one-bedroom apartment. Today, AEPG manages $700 million and employs 35.

Mr. Kaye serves as investment fiduciary for plans that have as few as two participants and as many as 1,000. His largest plan has $90 million in assets.

“401(k) consulting fees have come down a little,” he said.

They now range from 0.6% to 1% on the first $1 million in assets, declining as assets increase. Fees for serving as an investment fiduciary are somewhat lower, Mr. Kaye said.

Fees are paid by participants out of plan accounts, but “it is easy for the adviser to pay for himself though his service,” he said. “When a professional investment adviser selects mutual funds, expenses are lower and performance is better.”

Accountants are a great source of referrals, Mr. Kaye said.

“[Certified public accountants] love to help their small-business-owner clients reduce their liability, so I talk to accountants about how the foxes [plan vendors] are guarding the chicken coop,” he said.

Mr. Kaye targets prospects by plan assets or potential revenue, looking for plans with at least $1 million in assets or $10,000 in revenue.

When calling on prospects, he starts by explaining the potential liabilities that plan trustees face and the safeguards that should be in place to protect them.

Mr. Kaye said he also explains the needs of the plan vendor, versus the needs of the sponsor, and the various roles of each.

Some participants, such as vendors who recommend and manage funds, may have dual roles.

Next, Mr. Kaye presents a checklist for the plan sponsor, asking whether it has an investment committee, an investment committee agenda and if it keeps written minutes of each meeting. He also wants to know their process for evaluating funds, the rules that are in place to avoid ad hoc decisions, the policy for adding or deleting a manager, the funds used as the default option and whether the plan offers automatic enrollment.

Ironically, plan vendors have become a source of business. “JPMorgan Chase [& Co. of New York] brought me into a client even though we questioned the use of some of their funds on another account,” Mr. Kaye said. “As an investment fiduciary, the adviser accepts a lot of responsibility, so it is the maximum way for a sponsor to limit their liability.”

Mr. Kaye said the 401(k) business is “a great way to open doors — from managing the executives’ money to managing benefits. But it makes sense to have some pension capability or to partner with someone who has this capability, since often the company has money in a defined benefit plan as well.”

Mr. Kaye sees big opportunities for registered investment advisers, because so many plans are still not served.

“I recently attended a meeting for the Airline Human Resources Association of New York, and of the seven airlines in attendance, only two had written investment policy statements,” he said.

Libby Dubick is president of Dubick & Associates, a New York firm that helps advisers and financial services firms identify and develop distribution and marketing opportunities. She can be reached at [email protected].

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