For RIAs, time is ripe to pick off 401(k) assets

Planned regulations will hike the standard of care for those who advise DC plans. That should give RIAs a good chance of picking off assets from brokers and wirehouse advisers.

As employer-sponsored defined-contribution plans move toward increased fee transparency, registered investment advisers will be in greater demand to help manage the plans, says one longtime industry expert.

“There is a sea change in the retirement plan industry” that has plan sponsors looking for someone they can trust to help bring down costs and act in a fiduciary role, said Gary Allen of Prudent Investor Advisors LLC, a defined-contribution plan manager.

“Why aren’t you in the retirement plan business?” he asked the standing room-only crowd at the annual conference of the National Association of Personal Financial Advisors in Salt Lake City.

The answer: many in the audience were, in fact, very interested in what Mr. Allen called the “perfect” alignment between the RIA fiduciary standard and the rules required by the Labor Department’s Employee Retirement Income Security Act.

“While the industry drags its feet, NAPFA advisers are fee-only and in agreement with fee transparency, are fiduciaries to their clients and are best-positioned to provide conflict-free advice,” Mr. Allen said to the group, many of whom took notes while peppering him with nuts-and-bolts questions on how to get started.

Mr. Allen’s best advice was to be friendly with some ERISA lawyers, or failing that, to talk to clients who were small-business owners who sponsored plans of their own. That was how Mr. Allen said he began his own practice many years ago.

Fee-only advisers have an advantage over wirehouses and other broker-dealers over the “coming fiduciary issue,” which he said will underscore the “inherent conflicts of interest in their business model.” Plan sponsors are worried about new rules that go into effect next year that will require disclosure of fees that participants pay, Mr. Allen said. He called it a good opportunity to win new business and implement lower-cost plans now, before the disclosure rule goes into effect next year.

Advising the plans pays well, he said. For plans with less than $1 million in total assets, adviser compensation ranged from 0.5% to about 1%, with broker-dealers and insurance brokers being the biggest competition. For larger plans of up to about $10 million in assets, compensation was about 0.25% to 0.5%, and dropped further as plan assets rose. For RIAs, those midsize plans were a sweet spot and could be very profitable, Mr. Allen said.

Plan sponsors were wising up to the difference between good and bad advisers, but needed help understanding the plans, he said. Most advisers in the business now provide what Mr. Allen called non-discretionary investment advice. “I sit down with a plan sponsor and say, ‘This is the investment lineup we like,’” he said. “At the end of the day, the sponsor makes the decision,” though he warned that most plan sponsors think the adviser actually makes the decision.

Another caveat: Competition for retirement plan rollovers is on the rise as asset managers come up with retirement income products to keep accounts from leaving when an employee retires.

“The rollover business will slowly transform because of these income-for-life products,” he said. “If rollovers are a big part of your business, things are changing.”