Advisors find that employees, and even employers, are in the dark.

    When Brinker Capital investment consultants recently decided to expand into the 401(k) market with a managed account product, it was motivated by more than just the market's growth potential.
    Beside the 401(k) market's size, what impressed Berwyn, Pa.-based Brinker Capital was the need on the part of both sponsors and participants for professional and unbiased advice.
    Make that a crying need. As Brinker and other advisors in the 401(k) market are finding out, the "self-directed" retirement model has really provided today's workers with little direction at all when it comes to managing a 401(k) account.
    As a result, the average employee 401(k) is sitting unmanaged-if the employee has even taken steps to enroll in a plan. "Participants are dazed and confused," says John M. Ring, Brinker Capital's managing director of retirement plan services.
    This confusion, combined with a heightened concern among sponsors about their own fiduciary responsibilities regarding their employees' retirement accounts, has created a rising demand for professional investment advice, advisors say.
    Some advisors have already found themselves a comfortable niche in the market, with practices built upon comprehensive 401(k) plan consulting that includes the creation of investment policies, the selection and monitoring of mutual funds and asset allocation models, education seminars for employees and negotiating with plan providers on behalf of sponsors.
    Advisors involved in such work describe it as steady-a line of work that leads to solid relationships and steady income, although not the type of work that will lead to high margins. An advisor who consults for a 401(k) plan sponsor is typically making a fee of about 50 basis points, on an account that probably took many months to nail down after the initial contact, says Joseph Birkofer, principal of Legacy Asset Management in Houston and an advisor who has been specializing in 401(k) work for ten years. "What keeps most advisors out of this business is that it has a long sales lead time and a relatively low payoff," he says.
    Yet Birkofer feels the work he does is valuable-so valuable, in fact, that once he forges a relationship with a plan sponsor, he expects it will be long lasting. "The flip side is you're providing a service that is at the heart of most businesses' benefit packages," he says. "From a business model standpoint, you get a loyal clientele, cash flow stability and a growing asset over time."
Although plan startups can be part of an advisor's work, advisors say it's more typical for them to get involved with a pre-existing plan that, for various reasons, is being re-evaluated by a sponsor.
    In most cases, they say, they are dealing with sponsors who are being serviced by an insurance or brokerage company. "Typically, the concern may be that the funds aren't doing as well as they'd like and that the costs are pretty high," says Roger Wohlner, senior consultant with Asset Strategy Consultants in Arlington Heights, Ill.
    Wohlner says a large part of his work involves finding cost savings for sponsors by renegotiating fees and other costs. His clients usually haven't dealt with an advisor before contracting for his services.
    "A lot of times, plan sponsors don't know the right question to ask,"
    Wohlner says. "A lot of times companies will use this as a means to stay with a current provider but just to really get the plan in line with market rates."
    In other words, workers aren't the only ones confused by 401(k) plans, asset allocation and the fiduciary responsibilities that go along with sponsoring a plan. David Wade, principal of Pentek Advisory Group in Agoura Hills, Calif., which has been providing 401(k) consulting services since 1984, says there is a pervasive need for professional advice in both the administrative and investment management components of 401(k) plans.
    Of sponsors, Wade says, "I kind of categorize folks into two areas: those that don't know and those that know they don't know."
    He is so sure that demand for advisory services will continue to be in high demand that his company is ready to launch a service that provide an administrative solution for 401(k) plan advisors. That would include, he says, guidance in developing investment policies, record keeping services and other administrative services.
    Sponsors are often ignorant about the importance of an investment policy-one that outlines the process for selecting, monitoring and changing mutual fund offerings-until they hire a consultant, Wade says. "In most cases, the Department of Labor, when they audit a plan, is not looking for winning investments," he says. "They want to know what was your process and procedure for doing what you did."
    An advisor who steps in as a fee-only independent entity, with no products to push, is becoming highly valued among plan sponsors, Wade adds. This is partly because, in a small- to medium-size business market dominated by insurance and brokerage companies, sponsors have generally been dealing with commissioned agents.
    Wade recalls sitting down with representatives of one company that had used a 401(k) vendor for 15 years, largely because the company's owner played golf with the broker twice a year. What the company didn't realize, he says, was that the broker was receiving $50,000 a year from the company 401(k) plan in fees and commissions. On top of that, the insurance company that provided the plan was recapturing $10,000 a year through its own fees.
    "What it came down to is they were willing to pay $30,000 for each round of golf he was playing with the owner," Wade says.
    Another common problem, aside from a plan's performance, is a lack of fund offerings, says Mark Ferris, owner of Yankee Cents Financial Services in Old Say-brook, Conn. "I do find myself handcuffed sometimes," he says of his work advising clients on managing their individual accounts.
    It's common to find a plan that has only six or eight fund offerings, without any international options, and too heavy an emphasis on large-cap growth. "I had a case where one large company put one index fund in every category I wanted," Ferris says.
    Sponsors are also retaining advisors to deal directly with participant issues, including enrollment, education and asset allocation of individual plans. Most advisors are concentrating on the small- to medium-sized market, Wade says. The small market comprises 401(k) plans of up to $10 million, while a medium-sized plan is anywhere from $10 million to $100 million.
    Ring of Brinker Capital says that although his company knew the 401(k) field was crowded when it decided to enter the market this year, the company felt there was still a largely unmet demand for managed solutions. Employees, studies repeatedly have shown, have been unable to fend for themselves when it comes to asset allocation and the general management of their 401(k) plans. Ring cites studies that indicate 36% of 401(k) participants utilize only one mutual fund and 80% never rebalance their funds.
    It's an issue that has become more pronounced and politicized since the Enron scandal. The House of Representatives, for example, in early November took up a pension bill that would include incentives for employers to automatically enroll their workers. "It's professional management versus John Smith doing it himself," Ring says.
    Brinker is targeting plans in the $1 million to $100 million range, a focus that thus far has resulted in contracts with doctors' offices, law firms, engineering firms and foundations, he says. Brinker's solution consists of six model portfolios, or baskets, which plan participants can group together with the help of an independent advisor. After the initial selection, Ring says, the participants don't have to touch anything-they are rebalanced automatically.
    Birkofer of Legacy Asset Management says this is just the type of setup that he has been trying to utilize with his clients. The reason: No amount of seminars or other education efforts will enable workers to professionally manage their own 401(k) accounts.
    "We have utterly failed at making people their own individual pension committee," he says of the general transition toward self-directed plans. "Most people do not have the talent, the time or the temperament to manage their own portfolio."
    Birkofer says virtually all his clients use a plan setup where employees pick from among a selection of asset allocation models that are automatically rebalanced annually. "Most people set it and forget it," he says.