From the November 2004 issue of Investment Advisor • Subscribe!

Partners for Life

Retirement plan providers are courting RIAs like never before with a wide range of product and service offerings

While retirement plan providers are paying close attention to the Securities & Exchange Com-mission's proposed rules to impose a 2% redemption fee on mutual fund shares sold within five days of purchase to curb market timing, and the 4 p.m. EST hard close for mutual fund transactions, they're also busy creating products to satisfy one of their biggest customers: registered investment advisors.

"The intermediary channel--brokers, RIAs, and insurance agents--are going to be the growth drivers within the retirement business over the next five years," says Chris Guarino, president of BISYS Retirement Services. "RIAs are playing more and more of a prominent role in the distribution of retirement plans." Ninety percent of BISYS' business is derived from intermediaries, Guarino says, and that's plenty of business, since BISYS administers a whopping 21,000 401(k) plans. Because 401(k)s are sold and not bought, advisors are becoming a crucial component in the sales process. "As the [401(k)] industry has matured, there has been a proliferation of advisors that have said, 'I'm going to make my living selling retirement plans,'" Guarino says.

That's why BISYS recently launched an automated system to ease fee-based advisors' "administrative burden" when selling and servicing retirement plans, Guarino says. The product, "Total Disclosure," gives a plan sponsor the lowdown on all of the fees they're being charged, including fees levied by the advisor. The new program "allows a plan sponsor to see exactly where their dollars are being spent," Guarino says. Advisors can have their fees deducted automatically "by BISYS, and then the invoice that gets generated to the plan sponsor shows" all of the advisor's expenses. The new system leverages BISYS' existing platform, Guarino says, but BISYS enhanced its billing capabilities to get the service up and running.

The SEC Investigation

Sub-transfer agency fees--which can be paid in basis points or on a per-account-fee format--and 12b-1 fees are at the forefront of the SEC's probe of payments that mutual funds make to 401(k) plan administrators, Guarino says. Both of these fees, he says, will be clearly disclosed to plan sponsors through BISYS' new program.

Since the SEC's probe of revenue-sharing arrangements began, more and more advisors are looking to "replace their clients' 401(k) plans with something that is more affordable and flexible," says James Gilbert, president of Easytec Partners Inc. in Los Angeles, which distributes 401(k) Easy, PC-based software that gives small businesses the tools to run their own 401(k) plans. Advisors' clients are "bailing out" of the funds in their 401(k)s that they've found have hidden fees or have been caught up in the market-timing scandal, Gilbert says. Nearly 50% of 401(k) Easy's sales calls are from advisors searching for alternative investments for their small-business-owner clients, he says. 401(k) Easy collects no commissions, has no revenue-sharing arrangements, and no hidden fees, Gilbert maintains. Fees are based on the number of participants in a 401(k) plan. There is also a one-time $500 setup fee, plus an annual fee, which starts at $400 for a firm with five employees.

Gilbert says that after spending 20 years in the 401(k) business, he noticed an unsettling trend: 401(k) plans were too expensive for small businesses. So back in the late 1980s, Gilbert got the U.S. government to patent his idea of using "individual mutual fund accounts for the operation of low-cost 401(k) plans." He made arrangements with mutual fund companies to let him "set up individual 401(k) accounts at the fund." In 1995, Gilbert redesigned his idea by developing software that would create a "run-it-yourself 401(k) for small businesses"--thus the name 401(k) Easy. Through 401(k) Easy, "I was able to offer a very affordable 401(k) to small companies, and also offer them top-rated mutual funds."

The software keeps track of all of the plan sponsor's 401(k) accounts and performs all of the necessary testing that is typically performed on 401(k)s so that they qualify as tax-deferred growth vehicles. These tests include compliance testing, average deferral percentage (ADP) tests, and top-heavy tests, which compare how much money in the plan comes from the owner, or sponsor, versus how much of the plan's assets are coming from employees. Small businesses can buy the 401(k) Easy software at www.401k-easy.com. "We customize [the software] for the small businesses and they can run it on their PCs," he says. The software replaces the need for outside administration, Gilbert says, and saves a small business thousands of dollars per year, all while allowing the advisor to access high-quality investments.

Gilbert's 401(k) Easy software has been compared to Quicken in terms of how easy it is to use. More than 900 small businesses use the 401(k) Easy software now, Gilbert says, including a number of advisors' clients. The small business owner "clients buy the product, and then brokers and RIAs get involved in selecting investments and helping participants pick investments." The average small business owner "can run his 401(k) plan in less than 30 minutes a month" with the 401(k) Easy software. Gilbert says that with the software, a 20-person company could have a complete 401(k) plan--including custom documents and tax reporting--for $1,200 per year.

Missing the Boat

Gilbert says advisors who aren't servicing and selling retirement plans are missing the boat. Servicing and selling these plans puts the advisor "in direct contact with business owners and their employees," he says. "It's a great referral system."

Some large financial institutions became so enamored with 401(k) Easy that they asked Gilbert a few years ago to create a Web-based version for larger retirement plans. So he spent $1 million to build 401(k) Easy Online, available through www.401keasy-online.com. Gilbert runs the system--which has expanded capabilities to accommodate the needs of larger plans--and licenses the use of it to other financial institutions.

Most 401(k) plans for small businesses are too expensive, Gilbert argues, and the SEC's proposal to charge a 2% redemption fee on fund shares sold quickly after purchase would only make matters worse. A redemption fee will make plans "more expensive because there will be more technology that will need to be thrown at solving the market-timing problem," Gilbert says. Another problem, he says, "is that most 401(k) plans have limited investment options, and redemption fees would only further limit options because not every mutual fund company is going to want to set up the infrastructure necessary to deal with a redemption fee." Then there's the question of who would end up paying the fee. "Is it going to be charged to the investor, the whole plan, or the employer?" he wonders.

The majority of the comment letters the SEC has received oppose a redemption fee. John Heine, an SEC spokesman, says the regulator is still analyzing the comments, and that "no definitive decision" about levying a redemption fee has been made by SEC staff.

Most retirement plan administrators and intermediaries also oppose the SEC's 4 p.m. hard close proposal for mutual fund trades because it would force those on the West Coast to adhere to a 12 p.m. EST cutoff transaction time. But Gilbert of 401(k) Easy supports the SEC proposal. "Retirement plans are not supposed to be used as stock trading accounts," he says. "Whether a mutual fund purchase goes in on one night versus the following night, I really don't think it makes any difference. Mutual funds in a retirement account are not the same as highly leveraged stocks in a margin account."

Separate Accounts for 401(k)s

Meanwhile, AssetMark Investment Services, Inc. and Fiserv Investment Support Services recently joined forces to launch the AssetMark iFlex 401(k) Plan, a managed account solution designed to help plan participants with asset allocation and manager selection choices. iFlex offers six target allocation funds that are managed by Wilshire Associates and PanAgora Asset Management, says Debbie Ward, product manager for Fiserv Investment Support Services. Fiserv Trust Services is the trustee of the six collective funds.

The Target Allocation Funds include three strategic and three tactical asset allocation models: conservative, balanced, and growth. "The AssetMark advisors have used these strategies in individual accounts, and now they are available in 401(k)s," Ward says. AssetMark is a big client of Fiserv's, Ward says, "so we're helping them provide a 401(k) solution to their 1,800 affiliated advisors."

Ward says an increasing number of plan participants "may not know how, or be willing, to [select] their own investing options in a plan." Plan sponsors want to be able to choose one investing option and know that it's being managed by a professional money manager, Ward says.

In addition to the six target allocation funds, plan sponsors can choose up to 14 other funds from the 2,100 registered funds on the AssetMark iFlex 401(k) Plan list.

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@ia-mag.com.

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