Retirement specialists have outsized influence in adviser-sold DC market

Advisers specializing in employer-sponsored retirement plans have a huge share of the adviser-sold defined-contribution market, according to a new report from research firm Cerulli Associates Inc. Specialist advisers, or those generating at least 50% of their total revenue from defined-contribution plans, oversee nearly half — 45% — of the $1.3 trillion adviser-sold DC market, according to the report. DC plans harbored $6.8 trillion as of the end of 2014, according to the Investment Company Institute. Specialist advisers' market share far outpaces their share — which is minuscule — of the retirement adviser population. “The population of specialist advisers is not growing — rather it is their influence over DC assets that has increased,” Jessica Sclafani, associate director at Cerulli, said in an e-mailed statement. “In fact, the specialist adviser universe is quite small, representing less than 5% of total adviser practices.” The Cerulli report, "Defined Contribution Distribution 2015: Addressing Specialist Advisors in the Small and Mid-Sized Plan Segments," is based on a survey of more than 1,400 advisers across the U.S. and focuses on the small- and midsize plan markets — DC plans with $5 million to $25 million and $25 million to $250 million in assets, respectively. That's the sweet spot for advisers looking to increase their share of retirement business. The number of advisers tapping the DC market has ballooned since 2008, due to the shift toward DC plans as Americans' primary retirement savings vehicle and the recession-proof nature of the revenue for advisers. Employers have turned to specialist advisers to defray the complexities of DC plans, which have been top-of-mind following fee-disclosure regulation handed down by the Labor Department in 2012 and the spotlight on fiduciary duty due to the DOL's pending conflict of interest rule, sources said. “The retirement specialist introduces a level of DC investment and regulatory knowledge that the traditional financial adviser often cannot provide,” Ms. Sclafani said. “The specialist adviser is familiar with the processes the DOL is looking for — including documentation regarding plan fees and expenses.” Indeed, failure to promptly follow fee disclosure regulations is one particular area that could be ripe for litigation brought against plan sponsors. “DC plans are complex tools,” said Robert Vorlop, head of products and advice at Wells Fargo Advisors. “An adviser that works with these plans in-depth has a greater knowledge of how to navigate [them].” Knowing what the fiduciary responsibilities are for a plan sponsor, understanding the anticipated results for various participant education efforts and helping counsel plan sponsors on investment choices are some of the complexities specialists need to grasp to be successful, Mr. Vorlop said. Marc Caras, a director at Pershing overseeing the firm's retirement plan market strategy, attributes specialists' growing clout to advisers' evolving to capitalize on the increase in opportunity posed by the DC market. The advisers' business model is one of the most important considerations when deciding to become a specialist, Mr. Caras said. Specialists tend to provide expertise to DC plans in one of three broad buckets: investment services; relationship management, in which the adviser works with fiduciaries to select and monitor service providers; and issues surrounding the Employee Retirement Income Security Act and plan design. Acting as an investment professional is the “path of least resistance” to becoming a specialist, because investment philosophy and process tend to be a generalist adviser's expertise as well, whereas ERISA specialists are less common, Mr. Caras said. However, advisers can partner with record-keeping firms and third-party administrators to provide that specialized knowledge. “To be competitive in the space, having fiduciary status is important,” Mr. Caras said. According to a Pacific Investment Management Co. survey of consulting and advisory firms, 95% of respondents serve in a 3(21) fiduciary role with DC plans, and the percentage willing to serve in a 3(38) role is growing rapidly. A 3(21) role is a nondiscretionary relationship in which an adviser makes investment recommendations to a plan sponsor, while a 3(38) role involves enhanced fiduciary responsibility because advisers retain discretion to make changes without notice to a plan sponsor. More mature specialist shops often have in-house capabilities for functions such as participant education, in which a firm's principal is the one working with plan trustees and other staff work with employees, Mr. Caras said.