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.