Six months ago, financial advisor Charlie Massimo managed three 401(k) plans sponsored by small business owners. As of January 2012, he managed 20 qualified retirement plans, in addition to the investment portfolios of his individual clients.
"Plan sponsors realize they are on the hook legally if they don't know what's going on with their employee's defined contribution plan, so they are seeking out individual financial advisors more. We're getting five to seven inquiries a month from CEOs and plan sponsors that want help with their qualified retirement plan," says Massimo, whose practice is based in Melville, Long Island.
Prudential Retirement identified the trend as a growing practice area at its 2012 Global Economic & Market Outlook in January. The company has taken steps to provide webinars, conferences and one-on-one meetings for financial advisors wishing to specialize in the retirement area of plan advising.
"What we're seeing is that financial advisors are growing into the institutional and qualified space through a retail background," says Harry Dalessio, senior vice president of strategic relationships at Prudential Retirement. "In the past, the traditional role of the financial advisor was due diligence, fund selection and individual investment consulting. Today, the financial advisor's role is evolving into new product benchmarking, fiduciary oversight, plan design support, participant education and fee analysis."
The increase in plan sponsors seeking help from financial advisors to manage their qualified retirement plans is largely a result of the Department of Labor's Employee Benefits Security Administration (EBSA), which requires retirement plans such as 401(k)s and 403(b)s to provide extensive information about their fees and expenses to plan participants. "It's a potential pitfall in terms of liability for plan sponsors to not have a financial advisor on staff, because the financial advisor can formulate an investment policy statement to document the criteria used in the investment selection process," says Ary Rosenbaum, an attorney who has noticed an increase in plan participants filing lawsuits against plan sponsors.
The interest has been so high in this emerging practice area that earlier this year the American Society of Pension Professionals & Actuaries (ASPPA) created a subgroup called the National Association of Plan Advisors (NAPA) to meet the needs of financial advisors working in the 401(k) market.
"It's a specialized practice area with a lot of regulation," says Judy Miller, the director of retirement policy at ASPPA in Arlington, Va. "Financial advisors should be aware of the issues that apply to assets in qualified retirement plans. That's why there's a need for a subgroup. The initial response exceeded our expectations."
NAPA is structured as a professional society exclusively focused on advisors serving employer-sponsored retirement plans. Advisors will benefit from advocacy, business intelligence and networking designed to help them succeed and stay abreast of emerging industry trends and best practices.
The emerging plan-advising business is a win-win for advisors, who are at the mercy of the stock market's volatility. "Having a plan-advising business can offset your fee-based business and grow your asset base in down markets because plan participants contribute on a monthly basis regardless of the volatility," says Massimo. "The ability to grow assets becomes difficult if all you depend on is individual clients. Incorporating 401(k) business is a way to diversify your business and income."
For financial advisors new to the plan-advising business, Massimo suggests his own strategy: He offers up to six different diversified investment models, including 11,000 stocks in 24 countries. "It's key to go in with a low-cost model that is completely transparent and free of any conflicts," he says. "That can help you break into the 401(k) business."