This is not your Dad’s 401(k) plan space. The market has changed much in 20 years. The war stories that big advisory firms in the 401(k) space tell about getting into the business are not going to be the same ones advisors tell today. Much of this business used to be drummed up by advisors from clients they already had relationships with on other business (and perhaps with whom they played golf, too). Today, it’s a complex RFP carefully written to meet the specs of human resources pros in the corporate world. And with the increasing pressure by regulators to push fees down, it’s not surprising that, according to different sources, only a small fraction of advisors in the independent RIA channel are focused on DC plans.

“There are not a lot of RIAs that are specializing in 401(k) [plans],” says Brent Brodeski, CEO of Savant Capital in Rockford, Ill., which advises on $500 million in the space. “A few dabble and do a few plans. But this is generally a disservice to plan sponsors. The only thing in common between 401(k) plans and wealth management clients is both have investments. Everything else is different.”

For that reason, Savant has started to offer its 401(k) platform to other advisors and community banks who want to provide a solution but do not want to invest in platforms of their own.

But there are lots of reasons to get involved in the business. Simply put, defined contribution plans represent the single largest asset accumulation vehicle for most Americans. In 2015, the Investment Company Institute estimated DC plans hold $6.6 trillion in assets, with about $4.7 trillion residing in 401(k) plans alone.

Another attraction is that 401(k) plans are predictable revenue sources for advisors. Americans are constantly replenishing these retirement accounts from their paychecks every couple of weeks. That’s a regular, growing income stream for retirement plan advisors, at a time when many of their baby boomer clients are about to retire and enter the decumulation phase. Moreover, the money advisors receive from wealth management clients is lumpy by comparison, often coming from big payday events (like divorces, inheritances, job transfers or business liquidations).

And 401(k) advisors can snag other kinds of business from this specialty, things like the rollover IRAs of plan participants or the wealth management business of executives in the plans.

But the big plan advisors got into this space when it was a vastly different business. Smaller advisors who want in are likely to be doing it with third-party firms helping them bundle services, and those who specialize and don’t specialize will have to fight for the scraps.

So those prizes in the piñata are too good to ignore. In fact, Skip Schweiss, president of TD Ameritrade Trust Services, says that more advisors have become interested in the space since 2012, when the Department of Labor came out with new disclosure regulations requiring plans to fully disclose their compensation and plan sponsors to disclose costs. TD Ameritrade recently reported that of its 5,500 advisor clients, 10% of those are now using its retirement plan development tools. That’s almost doubled from 2014, he says.

“Even though [in a 401(k) plan] you can’t charge 100 basis points like you can your individual clients—you can charge 25 to 50, which is the range we see a lot—the attraction is … you have new money coming in every two weeks or every pay cycle for every plan you advise, and your individual clients simply are not adding money every two weeks like the plans are,” Schweiss explains. “So you get sort of a baked in AUM increase that way that you don’t get with your individual business.”

Yet advisors are also wary, and for good reason. Plan sponsors are bright targets not only for regulators but for class action lawyers on the hunt for what they consider to be abnormally high fees. Class action lawyers have found a new gravy train, and anything that sticks out like a sore thumb will give them an excuse to drag plan sponsors into court. Just ask many of the mutual fund complexes that have proved to be particularly juicy targets for the plaintiffs’ bar.

A case in point is a recent lawsuit against a subsidiary of computer equipment company Fujitsu. Class action lawyers alleged that the company’s pension, at $1.3 billion in 2013, failed to keep its costs under control, was among the top five most expensive plans among 650 others of similar size, and that its 2014 fees added up to 90 basis points when typical firms charged around 30 or so.

The suit bemoaned that employers have no incentive to keep from having high-cost, low-performing investments and referred to a study by public policy group Demos saying that “the average working household with a defined contribution plan will lose $154,794 to fees and lost returns over a 40-year career.”

What’s scarier is that this time, lawyers snagged an RIA firm into the suit as well: Boston firm Shepherd Kaplan had designed a target-date strategy for the fund, and not only were the fees allegedly higher, but the strategy reportedly used unconventional, speculative asset classes “such as natural resources, micro cap stocks, emerging market stocks, emerging market bonds, and real estate limited partnerships.”

It was too novel for the participants and their lawyers. (Shepherd Kaplan did not return calls for comment.)

The fear is that advisors in this hostile environment will continue to see downward pressure on their fees and Monday-morning quarterbacking when an asset class disappoints. Margins in the business already are slim. Throw in litigation risk and the appeal fades for many advisors. Finally, defined contribution plans also require a lot of administration expertise. So the conventional wisdom is that advisors who merely dabble in the space, the so called “two-plan Tonys,” will be flushed out.

But Schweiss says that’s not what he’s seeing. The rewards are too great, and fiduciary advisors are in the right place at the right time. He does say, though, that the fee squeeze has changed the business. Advisors on TD’s platform have 36% of clients’ 401(k)s in Vanguard funds and another 15% with Dimensional Fund Advisors. Among active managers, low-cost fund groups American Funds and T. Rowe Price lead the field.

“What we’ve seen since 2012,” says Schweiss, “when the Department of Labor disclosure regulations came out …. we started to see more advisors get more interested in the marketplace. It was about that time we saw more assets moving from higher cost plans and higher cost investment offerings to lower cost. We’ve seen quite a surge from more active managers to more passive managers.”

Schweiss believes it’s a great opportunity for RIAs, and he hasn’t heard many voice concerns about potential liabilities. TD Ameritrade’s platform pitch is that it can provide a turnkey offering and brand name to help these advisors compete, especially with smaller plans.

DC Nostalgia
The business has changed so much since the 1990s, that those in the business a long time might feel downright nostalgic. Back then, retirement plan business was something you got from your relationship with company CEOs—something they brought to advisors when they needed plans for the companies they ran. According to veterans, the business 20 years ago was focused almost only on investments.

That’s all changed in the age of fee scrutiny, regulation and litigation. Today, there must be processes, a rationale for the investments chosen, a close relationship with HR departments. Relationships are still important for small RIAs working with small plans, but at the high end of the spectrum, big advisory specialists will have to start going to casting calls and auditioning. Those who don’t focus just on 401(k) plans are going to have a harder time, say the big players.

Susan Conrad, the director of retirement plan advisors at St. Louis RIA Plancorp, has been in the industry 28 years, first at a boutique record-keeper where she started with plan design. She joined Plancorp six years ago after the firm had taken on about 10 plans. Regulations had become so cumbersome by 2011, she says, that her firm realized it needed someone like her on board full time. She came in and built a team that’s 100% focused on the retirement space.

It was the new fee disclosure requirements in 2011-2012 that changed the landscape, she says. “You had to know that your disclosures were compliant and that they were delivered at appropriate times. And interfacing with record-keepers along this line became more important.”

The challenge today, she says, is that strong advisors in the retirement space must know that they are basically an extension of the companies’ HR departments, she says.

That requires more of a time commitment. Because there’s a race to the bottom in fees, even record-keepers are pushing some duties back onto the companies, Conrad says. “HR departments are already overloaded with all their duties. So an experienced advisor will help them identify a record-keeper that’s best equipped to provide the level of service they need.”

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