Building a retirement plan practice has never been easy, but the task is growing increasingly daunting. Even financial advisors who’ve carved out large, successful 401(k) businesses are seeing new challenges.

Competition is heating up, as is litigation over fees and other matters. Advisors also face shrinking margins and are being asked more frequently by plan sponsors to take on a bigger fiduciary role.

The retirement plan industry offers “major challenges and major opportunities,” says David Shepherd, a co-founder and managing member of Shepherd Kaplan LLC, a $10.4 billion Boston-based independent investment advisory firm that had $6.58 billion in 401(k) plan assets under management at the end of 2014. “It really requires a commitment to excellence to get your arms around it,” he says.

Properly managing 401(k) plans is a multidisciplinary process that focuses not only on costs, vendors and investments, he says, but also—as plaintiffs’ attorneys look more at the space—on processes, reporting and auditing.

Advisors who aim to protect plan sponsors and plan participants by providing more robust fiduciary standards—which Shepherd thinks is a good idea—may amplify their clients’ liability, he says, if they can’t show a detailed process or defend it. The question is, he says, “Are you providing a shield or are you providing a sword?”

Companies including ABB, Lockheed Martin Corp., Fidelity Investments, Nationwide Life Insurance and Massachusetts Mutual Life Insurance Co. have recently settled class-action lawsuits brought by employees who alleged the companies’ 401(k) plans ignored their best interests. In February, the U.S. Supreme Court heard arguments in another 401(k) case, Tibble v. Edison International.

If you think the retirement plan climate is tough, “It’s going to be that much harder three years from now,” says Shepherd, as the regulatory environment gets more expensive and extensive. But he thinks independent advisors have a major advantage over firms that use proprietary investments in plan lineups, which is “a fundamental conflict,” he says.

Shepherd knows what it takes to build a 401(k) practice from the ground up. “We started in a basement,” he says, “and have grown the firm carefully over 17 years.” One of the things that helped his firm win clients was that it provided them with transparency and some control over the costs of their plan. “That was such a novel conversation back then that doors flew open,” he says.

Although transparency is increasingly becoming required under Erisa and U.S. Department of Labor regulations, he thinks advisors can differentiate themselves by how they engage clients in the discussion. The greater transparency got his clients excited about asking for help with wealth management needs. Now his wealth management practice leads to retirement plan business.

Advisors seeking to grow retirement planning practices must also invest in senior people and strong technology, he says. Shepherd Kaplan has in-house Erisa counsel and has developed its own technology to help measure and monitor costs, policies and processes. “We’ve written more than 9 million lines of code in the firm,” he says, to enhance and support its investment and fiduciary management efforts.

Getting Up To Speed
David Reich, an executive vice president at LPL Financial and head of its Retirement Partners unit, says the biggest change and challenge across the retirement plan industry over the past five years is that advisors interested in doing retirement plan business are more likely to have to invest in becoming fiduciaries.

In the past, a retirement plan wouldn’t usually work with an advisor unless it had at least $50 million in plan assets, but that figure is falling, he says. “Previously, a $10 million plan would have been a brokerage plan, almost certainly.” Now some plans this size have an advisor.

Another industry trend, margin compression, is occurring at “an alarming rate,” he says. But despite competitive pressures, “You have to make sure you’re not pricing your business under what it actually costs you to service the business,” he cautions.

Plan sponsors are more willing to pay for services that can better prepare employees for retirement. This includes education and advice. Good metrics to track, he says, are deferral rates and income-replacement ratios—how much participants must save in preretirement income to fund their retirement years.

LPL’s independent consulting unit has grown to more than 40,000 defined contribution plans with an estimated $115 billion in assets. Recently, the firm developed its Worksite Financial Solutions tool to help advisors cost-effectively engage, educate and guide plan participants. LPL also provides training and other tools to its 1,500 advisors with retirement plan business. To qualify as a fiduciary, an LPL advisor must at a minimum have the accredited investment fiduciary (AFI) designation, compliance approval and a clean Form U4.

“You have to have the expertise and underlying infrastructure to be able to do this business at scale,” says Reich. “For advisors to have to make it up on their own or piecemeal different capabilities together, it’s very difficult.”

Kim Anderson, a partner and head of the retirement plan division at St. George, Utah-based Soltis Investment Advisors, a fee-only RIA firm with approximately $1.7 billion in total assets under management or advisement ($1.2 billion of which is defined contribution assets) encourages advisors to take their time to learn the 401(k) business. “I don’t think you can just kind of jump into it,” he says. “You have to know what you’re doing.”

This includes understanding the level of responsibility required by Erisa and establishing a documented process that will withstand audits and lawsuits, he says. Another challenge, he says, is picking the right clients. Ideally, plan sponsors should value benefits and care about their employees. “That’s when participants have a larger probability of retiring successfully,” he says.

Soltis tries to help plan sponsors understand that a good plan can help companies retain key employees and explains how a creative plan design can help participation, he says. For example, auto enrollment and auto escalation “protect the participant who’s a victim of inertia,” he says. A stretched-match—in which an employer might match 50% on a 6% employee deferral instead of 100% on a 3% deferral—encourages employees to save more without added costs for the plan sponsor, he also notes.

Anderson supports the industry push for fee transparency, which has always been at the center of Soltis’ business model. But he says advisors should ensure that clients and plan participants also fully understand value. “If we’re just looking at costs and fees, we might disregard some incredible value,” he says. It’s also critical to study service models. That cheaper plan may not provide any education, he says.

Soltis, which has been in the defined contribution space since 1998, provides a variety of services (fiduciary services, investment management, education and advice). It always breaks out the fees for the services a plan sponsor requests.

Playing On Strengths
Experienced retirement plan consultants are often candid about their abilities. Soltis, which runs a call center for plan participants, likes plans with 500 to 1,000 employees. “Beyond that, we don’t have the personnel to service at the high standards we commit to,” says Anderson.

DiMeo Schneider & Associates LLC, a Chicago-based investment consulting firm with $55 billion under advisement at the end of 2014—including more than $30 billion in defined contribution assets—partners with Erisa attorneys and engages an outside compliance audit firm to help with expanding compliance demands.

“We can’t be an expert in everything, but what we can do is keep ourselves educated and informed, and keep clients informed on hot-button issues,” says Doug Balsam, a principal and director of institutional consulting at DiMeo Schneider.

“Cost pressures and compliance are part of the market more than ever,” he says. So is fiduciary interest. Most of the firm’s client relationships are as an Erisa Section 3(21) co-fiduciary, but requests for it to serve as a 3(38) discretionary fiduciary have started to accelerate in the past three years. Half its new prospects now ask about it.

DiMeo Schneider, which has worked with retirement plans since its 1995 launch, focused on investments before the proliferation of index funds. Now it aims to create a strong balance between the fiduciary and investment management sides of the business, says Balsam. Each year, the firm—now about 75 people strong—adds one to two individuals to its investment research team and one to two consultants.

DiMeo Schneider also works with plan sponsors and record-keepers to build out a two-to-three-year education calendar for each plan based on its demographics. As competition mounts, the firm is making big efforts to reach out to clients and prospects and to create relationships with strong centers of influence, such as record-keepers and Erisa experts. It produces white papers, publishes a tri-annual newsletter and provides intermittent updates to maintain constant contact and strong visibility, says Balsam.

Advisors entering the retirement plan space, he says, need to understand the environment, have a compliance mind set and make sure they don’t underestimate the work. “Even for us, there are a lot of industry changes to absorb,” he says—and he expects the next 10 years to bring more.

“This can’t just be some side business,” says Balsam. “It requires a committed strategic partnership with the clients you’re trying to serve.”