On Retirement

Mary Beth Franklin: Waiting for rollover money a roll of the dice

Advisers who take over clients' 401(k) decisions early in the game end up capturing the bulk of the dollars later; snooze you lose

Jul 5, 2012 @ 1:11 pm

By Mary Beth Franklin

I talked to Mike Scarborough, president of Scarborough Capital Management in Annapolis, Md., the other day as I was researching a story about lump sum distributions from pension plans. (You can read all about it in my column in next week's print edition of InvestmentNews). While I was talking to Scarborough, who counts thousands of GM employees and retirees among his clients, he discussed his philosophy of managing their retirement assets while they're still working -- and how that approach differs from much of the advisory industry.

“Everyone is looking at the wrong end of the horse,” said Scarborough. “The bulk of invested assets are sitting in 401(k) and 403(b) defined contribution plans, but the investing community is always chasing the 20% of money that rolls over at separation of service,” he said. “We're signing up the people that most of the investing community doesn't want.”

Scarborough explained how his team manages 401(k) investments for about 1,700 active GM employees, charging them $425 per year to handle all the investment decisions within their retirement plan, review it quarterly and nudge them to save more money when necessary. Scarborough's firm has limited power of attorney to make all the investment transactions for a client within their employer's plan. Because their relationship is with the participant, rather than the plan sponsor, third party administrator or record keeper, his firm is not affected by the Department of Labor's new fee disclosure rules that took effect July 1.

“I get a modest amount of money to maintain a relationship and manage their money,” he said. “Then when it comes time from them to leave or retire, we're getting about 94 cents of every dollar at separation of service because we've managed their money over the last 20 years.” As a result, Scarborough Capital Management has about 3,000 retired GM employees as clients.

It's a business model other advisers may want to consider. “If you are seen as the person who has been shepherding their serious money, then at separation of service, that client already knows you,” he said. “Patience pays off.”

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