Is it truly worth the time and effort to build a 401(k) practice — or expand your existing one?
Is it truly worth the time and effort to build a 401(k) practice — or expand your existing one? That depends: How do you feel about an almost $3 trillion market that could help insulate your business from market volatility and deliver a relatively consistent level of institutional-quality assets, as well as be an additional source of fee revenue?
If you're like many of the advisers I work with, you're taking a closer look at the 401(k) market.
Already enormous, its size should increase significantly over time as traditional defined-benefit plans become obsolete and individuals assume greater responsibility for their own retirement savings.
But market size isn't the only thing that matters in this case; opportunities exist on several levels. Defined-contribution assets can strengthen your practice with recurring, predictable revenue for many years. Working with plan sponsors also may help in generating individual leads from plan participants, which could mean substantial growth for your overall business. Finally, providing 401(k) solutions brings you into contact with entrepreneurs and successful business owners.
That said, the business is not without challenges. Constant change in the regulatory landscape makes it imperative to understand and stay current on the details of the business, and to be ready to adapt to new requirements and realities. The question, then, is how to develop a 401(k) business that stands out in an increasingly competitive marketplace.
Let me touch on four principles for 401(k) success:
Service. Since successful relationships are those based on exceptional service, setting clear service expectations at the outset of a relationship is important. Doing so enables you and your client to evaluate your contributions based on the same criteria, while also helping you plan ahead to deliver services efficiently and cost-effectively. This is the key to retaining accounts, and retention matters because helping a plan get up to speed may take a significant effort upfront. Once you have helped the plan sponsor set up consistent processes to manage the plan's needs, your role is likely to become easier over time.
In general, a plan sponsor's main concerns are whether its plan meets the needs of employees and participants, and whether fiduciary responsibilities are being well-managed. Plan sponsors need information and resources that will assist them in accomplishing these goals. The more accurate, disciplined and dependable you are in providing these things — all components of “service” — the clearer your value as a financial professional, regardless of how the plan's investments perform at any point in time.
When it comes to planning for the efficient delivery of services, the more 401(k) business you do, the more important it is to think ahead about how and when you will deliver the services you have committed to provide. Plan to combine employee education or enrollment meetings on the same morning or afternoon as in-person calls on sponsors and fiduciaries; that makes it possible to provide outstanding service with a commitment of just one day or less per quarter.
Education. The most visible element of your service to a plan is education, because it goes beyond your relationship with the plan sponsor and includes the company's employees. Done well, educating plan participants benefits everyone involved, including you. The better you are at educational seminars and enrollment meetings, the more likely that participation and total assets in the plan will grow over time, cementing your relationship and enhancing the plan's value to your practice. What's more, you will be seen as an authority on financial issues, and highly compensated employees — or those who have received a personal windfall, such as an inheritance — are more likely to contact you about helping them with their own needs. Plus, earning a reputation as a highly valuable expert adviser can lead to substantial rollover business as plan participants retire.
Your fiduciary responsibility. Understand exactly when and how you could be designated a fiduciary, and in what circumstances you might become one unintentionally. While some advisers may want to act as fiduciaries, many do not. What matters is having a clear understanding of what fiduciary responsibility involves and whether you are crossing that line. If you don't want to assume fiduciary responsibility, you never want to act, or be viewed as acting, unintentionally in a fiduciary capacity for purposes of the Employee Retirement Income Security Act of 1974.
If you want to avoid being designated as a fiduciary, be sure to document instances in which you are presenting information on investment issues exclusively as background. It's vital that plan sponsors and fiduciaries understand that the information you provide should not be the primary basis for their investment and other plan-related decisions, and that they are solely responsible for such decisions. Be sure that you provide information in a manner consistent with your firm's compliance policies and standards, with respect to the positioning of your services with plan sponsors and fiduciaries.
Relationships with others. Many of the advisers I work with would like to develop a 401(k) practice but wonder whether they have sufficient expertise to do so. As a result, they may allow the opportunity to pass them by.
While it's important to have specialized knowledge in this area, it's also important to have reliable partners — including third-party administrators, record keepers, ERISA attorneys and other service providers — who can help address a plan sponsor's needs and questions.
Before venturing into the 401(k) business, identify the service providers you will need to create a powerful team. Coordinating with them in advance will help you build a turnkey offering that can be easily implemented. You may want to have several relationships in place so you have the flexibility to address different plan needs and preferences. Plus, by pulling together a strong team, you increase the likelihood of receiving business referrals from your team members.
As more advisers recognize the enormous potential of the 401(k) market, we're seeing two distinct approaches emerging. There are those we call “dabblers,” who have picked up some 401(k) business or have won several engagements, and see it not as a core offering but as a way to create balance in their overall book. Then there are the plan advisers who focus day-in and day-out on building a strong presence in the defined-contribution market.
While the expanding 401(k) market makes dabbling possible, the market's increasing competitiveness means that dabblers will have to step up their game if they wish to continue providing these services.
Jeff Masom is the managing director for financial institutions at Legg Mason Inc.
