From the February 2003 issue of Investment Advisor • Subscribe!

February 1, 2003

Not So Bad

Recommending and running 401(k) plans needn't be s

Recommending qualified plans to business-owning clients is, in most independent advisors' minds, one of their least favorite tasks. Advisors tend to steer clear of qualified plans because they think, as Michael Butler, senior VP of retirement services at NFS Distributors, Inc., puts it: "The plans are complicated, and they don't pay well enough." The former complaint is often true enough, but it can be remedied by partnering with a good 401(k) plan provider (see our list of such providers on the next page), and staying abreast of regulations and changes in the marketplace. As for the latter worry, Butler believes it's just not true.

Most advisors fail to consider the "recurring deposit business" they can garner from qualified plans, he says. For instance, most clients participate in 401(k) plans through automatic payroll deductions, which remain steadfast even in down markets. "People don't run to the HR office and stop" their 401(k) contributions when the economy and markets turn sour, Butler says. "As long as advisors hold on to the plan and service it long-term," they're guaranteed a "recurring commission stream." And qualified plans are a perfect entr?e into the booming IRA rollover market. Advisors are "in a great position to influence and attract IRA rollover dollars from the people they earned money from on the 401(k) side," he says.

Brian Graff, executive director of ASPA, a national organization of retirement plan professionals based in Arlington, Virginia, agrees with advisors that it's easy to get bogged down in 401(k) plans' administrative complexities. But these plans do have an upside: "401(k) assets are held longer, and there's less churning [of accounts]" than in other plans. And if advisors are worried about losing control of assets in a 401(k) plan, Graff says the best thing to do is hire an independent firm to take care of the plan administration so the advisor can focus on managing the plan's investments.

Post Enron, fiduciary liability has become of paramount concern to advisors and plan administrators. Graff says 401(k) plans could face additional administrative burdens soon, as the House was scheduled to reintroduce last month legislation that would require, among other things, more frequent delivery of benefit statements, increased information on investing, and additional investment education data.

"There's certainly more concerns about responsibility and potential liability due to the fact that 401(k) accounts are going down" in value, Graff says. This spring, he says, 401(k) legislation may be introduced to clarify an administrator's fiduciary obligations when taking over a plan from another sponsor. "That's positive," Graff argues.

The controversial investment advice bill allowing financial services companies that administer 401(k) plans to give investment advice to employees will be reintroduced soon in the House, too, Graff says. "Everyone expects it to pass the House," he says. "The question is what happens in the Senate."

Expect more regulatory easing as well. Kathryn Capage, strategic director of AIM Investments' retirement and education products division, says she expects President Bush to allow consumers to put from $15,000 to $20,000 per year in their 401(k)s before 2006. Relaxed regulations will also come in the form of new products. For instance, a recently instituted Treasury regulation allows 401(k) plan participants to secure loans via credit cards. "There's been a lot of administrative hassle in accessing a loan" from a 401(k) account, Graff says. The credit card loan "would be a drawdown against your 401(k) account that you would pay back with interest."

To view the Retirement Planning Directory, go to: http://www.investmentadvisor.com/magfeatures/401(k)Dir.pdf.

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