Most retirement plan advisers tend to avoid small retirement plans, but one consultant has built a system to scoop them up and service them.
Chip Morton, president of
Team SCM Advisors Inc., has launched
Direct 401K, a registered investment advisory that will provide fiduciary investment management services to small retirement plans under Section 3(38) of the Employee Retirement Income Security Act of 1974.
The firm will be working with
Envestnet Retirement Solutions, using its technology to scale the provision of fund selection services and portfolio construction for retirement plans with fewer than $2 million in assets. Direct 401k is also contracting with a number of record keepers as part of the offering; clients will be able to seek quotes from those firms through the service.
The premise is based on the idea that while advisers seek large retirement plans, there are plenty of small plans that go unnoticed. Such plans don't attract much interest because their asset levels are low, while requiring the same fiduciary needs that an adviser would give to a large plan.
Many small plans are being serviced by so-called
blind squirrel brokers who don't specialize in retirement plans, but still have a handful of plans in their book of business.
“In the small plan market, when 'Two-Plan Tony' sells the plan, it's very rare that he goes to plan meetings [afterward],” said Mr. Morton. “He probably has a wealth management relationship with the president of the company.”
He believes that horizontal growth is the way to making the concept a successful one; technology can scale investment management and record keeping services and provide them to large numbers of tiny plans.
The catch: It's not an arrangement for plan sponsors who want high-touch services from an adviser who will visit and take calls from business owners. Direct 401k is primarily for small startup retirement plans who just need to get started, or who want to outsource the fiduciary duty of investment selection and monitoring.
PROS AND CONS
The development of Direct 401k was cheered by some industry observers. “I think there needs to be in our industry more of an effort to develop products and services for the untapped market of small businesses that don't have retirement plans,” said Brian Graff, executive director of the American Society of Pension Professionals and Actuaries.
But retirement plan experts noted that the service has its limitations. “The biggest head wind for a program like this is that most employers prefer having to deal with a person,” said Lou Harvey, president of Dalbar Inc. “It's overcoming that notion that instead of chatting with this adviser who sits in your office and makes you feel warm and fuzzy, you're typing stuff into your computer.”
FIDUCIARY LIABILITY
What plan sponsors should know is that there are multiple dimensions to fiduciary duty, and not all of it can be outsourced away. Plan sponsors who sign up for 3(38) investment management services still have exposure to fiduciary liability in two areas: selection and monitoring of the service provider, and administration and reporting, said Jason C. Roberts, chief executive of Pension Resource Institute.
“The lion's share of litigation is in the service provider bucket, where we get into 12b-1 fees and share classes,” he added. “I tell our small plan sponsor clients that if they're looking to mitigate risk and save time, to take a look at 3(38) programs, but we tell them at the same time, this is where you have to focus [service provider selection and administration].”
