For most independent financial advisors, helping businesses set up 401(k) plans hasn't been a big part of what they do. Intense competition, extensive due diligence to evaluate and recommend investment alternatives, regulatory requirements and follow-up services for companies and their employees have kept many advisors from committing themselves.

Yet some advisors have found it lucrative to specialize in the 401(k) market, despite the low-margin, service-intensive nature of the business. And the Internet and other technological advances have made it less difficult to evaluate the multitude of programs available and provide high-quality, sophisticated plans to smaller companies.

What may make the 401(k) market even more attractive to some advisors is The Retirement Security Advice Act, H.R. 2269, which was sponsored by Rep. John Boehner, R-Ohio, and passed by the House with bipartisan support in November. The legislation would create an exemption from prohibited transaction rules so that an advisor who gets paid 12(b)-1 fees from fund companies for recommending their offerings to plan sponsors also could get additional fees for giving individualized advice to plan participants.

The bill also allows fund providers themselves to offer such individualized advice. Fees and conflicts would have to be disclosed before investment advice was delivered. Supporters say it makes sense for firms most familiar with the plans to be able to explain what's best for individual participants, and advisors and funds alike are hoping those personal relationships will lead to more IRA rollovers for their firms to manage.

Opponents, on the other hand, say the bill creates conflicts of interest by promoting double-dipping and could lead advisors to recommend funds to individuals on which they will collect bigger fees. More palatable to many of them is a bill introduced in the Senate by Sen. Jeff Bingaman, D-N.M., S. 1677, the Independent Investment Advice Act of 2001. It would hold plan sponsors harmless if they hire qualified, independent investment advisors to provide participants with advice. But it would not create a prohibited-transaction exemption, so firms collecting 12(b)-1 fees for advising sponsors still could not charge additional fees for providing individualized advice to participants.

What version, if any, of these bills Congress will pass this year is questionable. But observers say some form of pension reform is possible in 2002 because of the Enron debacle, in which many employees lost almost all of their 401(k) savings because most of it was invested in company stock. (Enron employees couldn't sell stock the company gave them until they turned 50, although they could sell shares purchased with their own money. Also, the Department of Labor is investigating the freezing of accounts during a period in the fall when Enron was changing plan adminstrators.) Pending legislation in Congress would limit 401(k) investments in company shares, and it's possible the Boehner or Bingaham bills, or parts of them, could be incorporated into that.

Regardless of what happens in Congress, some advisory firms already think the 401(k) market is attractive. But serving this market is such a labor-intensive proposition that most advisors need home-office support to make the business viable for them. In particular, staying abreast of plan design and regulatory issues, as well as knowing providers and their products, are time-consuming jobs.

In an attempt to make those tasks easier and help advisors grab a piece of the market, Raymond James launched RJSearch401k.com, an online, research tool accessible to 4,400 of its advisors. The site, developed and built in a private-label arrangement with PlanAnalytics Inc., the parent company of Search401k, allows advisors to research and compare more than 30 of the top 401(k) providers.

The site evolved from a process that began a couple of years ago, when Raymond James decided it wanted to offer proprietary 401(k) resources-rather than its own product-to its advisors. The primary objective of the firm was to help advisors differentiate their services in an increasingly commoditized marketplace, says Jeb Graham, national director of Raymond James' retirement-plan consulting group.

"The advisor has to establish value in the eyes of the client. He has to show how he can add value and then differentiate himself from competitors to win business," Graham says.

Raymond James' first step was to formalize 401(k) training for advisors interested in this market. The next was offering tools advisors could use to add value for the client, and that began in April when the company rolled out a comprehensive, electronic vendor guide. In October, the firm introduced RJSearch401k.com. Since then, almost 10% of its advisors have created profiles on the system, a result that has Raymond James very pleased because there's been more interested than was expected, Graham says.

Graham thinks advisors who provide 401(k) services have a big chance to develop new business. "No. 1, it's an opportunity to provide a service that's in demand. Most companies have problems with their 401(k) plans; the service is a problem. And the reason is there's a disconnect between all the moving parts that need to be linked together for the 401(k) process to run smoothly. Plan sponsors and participants need help, and not a lot of advisors are doing a good job," he says.

Duane R. Thompson, the Financial Planning Association's director of government relations, says although retirement planning is by far the largest niche for its members, most haven't been acting as 401(k) investment managers or consultants. Those who are involved with 401(k) services typically provide advice to individuals whose portfolios include such plans or give nonpersonalized 401(k) presentations and seminars to employees of various companies, he says.

However, a handful of advisory firms, including Sullivan, Bruyette, Speros & Blaney, based in McLean, Va., have been hired by companies as investment consultants or advisors to 401(k) plans. Mark Johannessen, the firm's director of retirement planning, says as a consultant, he reviews investment alternatives and makes recommendations. "Someone calls us in and says 'I've got 14 proposals on my desk, and I need someone to sort through and distill them,'" he explains. When the firm has been hired as advisor to the plan, Sullivan, Bruyette not only makes such recommendations, but also develops the specifics of the investment plan and policy statement and helps the company communicate benefits to employees, he says.

Depending on the wants and needs of the client, the firm sometimes recommends a bundled, turnkey approach, in which investment choices and administrative services all are offered through one 401(k) provider. In the unbundled approach, the firm often uses Charles Schwab & Co., which offers a variety of no-load mutual funds and a list of preferred third-party administrators.

Sullivan, Bruyette has been in the 401(k) market for more than a decade and currently is running about 10 plans, Johannessen says. The firm, which charges sponsors on a fee-only basis and accepts no compensation from individual funds in 401(k)s, typically won't take plans that have assets of less than $2 million. "With the expense of getting the plan up and running, even at $2 million it would take a year to a year and a half to break even on that client," he says.

One of the latest trends he's seen is plan sponsors calling to request a review of the process they followed when they put their 401(k) plans in place. As fiduciaries, companies have to be able to justify how they chose their plan providers and the process they used in choosing investments, he explains.

Johannessen says most of Sullivan Bruyette's 401(k) clients are business owners it has advised previously on other matters. This type of business has its disadvantages, as well as advantages, he notes. "The con is it's very competitive, and regardless of the good customer service you can bring to your client, there are outside factors that can take the business away. For example, a change in ownership in the business, which we've seen as a big one," Johannessen says. "The pricing on plans is extremely competitive. Sometimes, a company gets a new CFO, and he may want to make a mark, and he comes in and questions what's being done."

"The pros are when it's working right and you have enough of these clients, it can be an annuity kind of business. When you're doing it correctly, you can build yourself a nice niche practice. You've really got to concentrate and be a specialist and be ready to adapt," he says.

Richard M. Todd, a principal in the Greenwood Village, Colo.-based InnoVest Portfolio Solutions Inc., says about 60% of his firm's business is acting as a consultant on retirement plans. InnoVest works with such clients on a retainer basis to help them design their investment menu, coordinate employee communication and perform ongoing evaluation and monitoring of investments. Todd says InnoVest has evaluated 40 retirement-plan providers and developed a database of provider services, features and costs.

One big issue plan sponsors have now, he says, is how to reduce the costs of the plan. "A lot have had relationships with vendors for years. They are paying asset-based fees, and account balances have grown significantly, and those vendors are making a lot of money. There's a lot of room for renegotiating," he adds.

Many in the business agree technology, including the Internet, have driven 401(k) costs down, allowed companies to expand their menus of investment alternatives and made plans more affordable for smaller businesses. For advisors, Internet-based services such as the Mendota Heights, Minn.-based Search401k, make it easier for them to compare products and expenses. Eric Schneeman, Search401k's founder, says the firm's database includes 105 products from about 80 providers, representing 90% of all business sold.

Opportunities do exist for advisors to serve the smaller market, he says. Only 49% of companies with fewer than 500 employees have defined-contribution plans, and that drops to 23% for companies with fewer than 100 workers, Schneeman adds.

Problems have been that providers don't make much money on smaller plans, so many don't offer them, and advisors had to spend months trying to evaluate choices for a prospective client, he says. Also, many advisors have concentrated too much on finding plans with the lowest administrative costs, as opposed to those that provide the best service, he adds.

But Search401(k) and other services can cut dramatically the time it takes for advisors to research plans for clients, including smaller ones. Other companies also are marketing products that are aimed at reducing the time advisors must spend serving the 401(k) market. For example, GoldK, based in Waltham, Mass., offers a full-service electronic and investment platform for financial advisors who provide 401(k) plans. "What we've done is allow financial advisors to set up and service many more plans than they normally could," says Troy Shaver, GoldK's vice chairman. "We're seeing financial advisors who are setting up a plan a week with us."

Schneeman says advisors who will win in the 401(k) market are the ones who can demonstrate their knowledge of the industry and provide ongoing services, including reviews and due diligence, for clients every year.

Raymond James' Graham agrees. He says advisors who will do well in this business are the ones who understand the market, take responsibility for plans and go to clients and say: "You hire me, and I'll make sure your 401(k) plan works."

"I think all in all, the 401(k) business model is as good as you can get for building a business. The difficult part is the long lead time," Graham comments. "For advisors already specializing in the business, it's been a tremendous amount of work that's now paying off. If you talk to 10 different advisors who are successful with 25 or 30 plans on the books, they'll all tell you that's the way to go, that they'd have started sooner. But where is the threshold between zero and 30 plans that it becomes profitable? For some, it might be five plans, for others it might be 10 plans. A lot of advisors don't stay with it long enough. A lot fall back on their own comfort zone. But those taking advantage of it are really running downhill."