How to build a 401(k) business from scratch

Advisers and industry gurus provide their thoughts on how to get started

Sep 4, 2015 @ 12:01 am

By Greg Iacurci

Advisers have poured into defined-contribution territory over the last several years. Before the 2008 recession, approximately 150,000 out of 300,000 active financial advisers were getting paid for services provided to a DC plan, according to figures from The Retirement Advisor University. That number has since ballooned to 250,000.

“There's plenty of opportunity,” said Fred Barstein, founder and chief executive of TRAU. “There are lots and lots of plans.”

According to Labor Department statistics, there are approximately 500,000 401(k) plans in the country. Around 159,000 of those have between two and nine participants (generally considered the “micro” market) and 274,000 have between 10 and 100 (the “small” market). Smaller plans are where people typically recommend fledgling 401(k) advisers get their start.


Having a working knowledge of the Employee Retirement Income Security Act of 1974 is pertinent, advisers say. Learning the act's rules and regulations is the main differentiator between wealth management and retirement plan advising, said Robert E. Pike, president and chief executive at Stratford Advisors.

“It's almost like getting a quasi-law degree,” said Mr. Pike. His firm manages roughly $60 million, split 20%/80% between retirement and high-net-worth business, respectively. “An adviser must be prepared to invest time acquiring this specialized kind of knowledge.”

There are several online resources to help, such as those provided by the Plan Sponsor Council of America and fi360, a consultancy on fiduciary matters, Mr. Pike said.

As Mr. Barstein points out, advisers don't need to be ERISA experts. They can partner with record-keeping firms or independent third-party administrators who can provide that expertise. Advisers do need to have a technical understanding of the inner workings of 401(k) plans, though — for example, knowing plan design and the functions of different vendors such as record keepers and TPAs — to be able to hire and monitor experts, Mr. Barstein said.

An important part of managing vendor relationships is understanding all 401(k) fees and benchmarking them.

“You almost have to become a detective,” Mr. Pike said. “You must learn how to disaggregate the cost of the plan, who's paying who for what. It's not just the investment cost, but the cost for providing administrative services, the custodial cost, record-keeping fees.”


Most advisers are skilled salespeople, but 401(k)s require a different sales approach and entrepreneurial mindset. The buyer isn't the user in the case of DC plans, because pitches are aimed at a human resources employee or chief financial officer, for example, rather than plan participants, Mr. Barstein said.

Wealth managers are also more accustomed to selling to individuals, whereas 401(k) plans, especially those of larger organizations, involve tailoring conversations to a group.

“When I sell, I'm not selling to one person. I'm working with committees,” said Jason Chepenik, managing partner at Chepenik Financial. Mr. Chepenik's firm manages approximately $1 billion in assets, 70% of which comes from 401(k) business.

Bank of America Merrill Lynch's Joe Mrozek said retirement plan advisers must tweak their service models from those used with wealth management clients to be successful. As head of corporate and middle-market business development and adviser programs, Mr. Mrozek and his 60-person team offer support for BofA's network of 401(k) advisers.

Whereas HNW advisers meet with clients perhaps a few times per year, an average 401(k) plan client requires more attention. Advisers can expect to provide monitoring reports, meetings for new plan enrollees, and fiduciary committee meetings several times a year, Mr. Mrozek said.

The number of Merrill advisers actively prospecting 401(k) business is up 7% year-over-year, or approximately 1,000 advisers, through April. The firm had 14,370 advisers total as of June.

Mr. Mrozek attributes that rise in part to the diminishing presence of pensions and a turn toward 401(k) plans as the retirement savings vehicle of choice.

“Advisers like this business because it's kind of safe revenue,” Mr. Barstein said. Even though the basis points made per client are usually lower, 401(k) plan assets are almost “recession-proof” because plan participants tend to keep their money in 401(k)s even when the market dips, he explained.

But 401(k) advisers' margins are getting squeezed, largely because of DOL fee-disclosure regulations and the hypercompetitive nature of the 401(k) market, so continuing to add plans to an adviser's book of business is important to remaining profitable, Mr. Barstein said.

“I think that in wealth management, especially if you're high-net-worth and dealing with individuals, you can remain profitable with just a few clients,” he said.


Scoring a meeting is the most challenging issue for all advisers, from the specialist DC advisers to the “blind squirrels,” when prospecting for 401(k) business, Mr. Barstein said.

Making use of existing wealth management relationships, if those clients happen to be business owners, is a good place to start because there's already an established trust, advisers indicated.

Networking with business owners at functions sponsored by associations such as the Chamber of Commerce could also prove effective, Mr. Barstein suggested.

“It is very difficult to cold market to business owners and to businesses,” said Nate Lucius, managing director at Gradient Investments, underscoring a general consensus among other adviser sources that cold calling tends to be the least effective solicitation method.

However, there are ways advisers can make that barrier a bit less daunting.

Mr. Pike, for example, believes the most effective prospecting method is targeting clients that mesh with an adviser's practice. He describes Stratford Advisors as “quants” and “geeks” specialized in using “academic firepower” in their investment approach. Therefore, his retirement clients tend to be professional services companies, such as engineering or law firms, with a skilled labor force. Prospects were targeted based on NAICS (North American Industry Classification System) codes, which Mr. Pike broke down in a spreadsheet and identified the 25 codes with which his firm best matched.


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