From the March 2010 issue of Investment Advisor • Subscribe!

March 1, 2010

Advice for Advisors

Working with some 1,000 retirement plans certainly keeps Gerald Wernette of Rehmann Financial abreast of the latest trends in retirement. He has some first-person advice to share with other advisors some advice on serving the that market.

"If you're an advisor and you're going to be in this business, you better be working with a model that is going to allow you to monitor the investments in the plan in a way where a [plan sponsor] client can build a due diligence file, show the Department of Labor that they've been doing their job when it comes to monitoring investments in conjunction with an investment policy statement, and have a process for making decisions as to when funds should be changed," he says. "At the same time, they also need to have an ability to do a periodic review of the plan from the perspective of all the different elements that are coming together to make that plan work--what the costs are, how it benchmarks against their peers in the industry--so they can keep a handle on what the plan is costing so they can keep a fair value at the end of the day."

Wernette says more emphasis is being placed on encouraging eligible employees to participate in retirement plans, to contribute enough to those plans and to make good investment decisions. "We're seeing tools like retirement gap analysis become a lot more prevalent out there," he says. "We're also seeing much more emphasis being put on advice solutions, managed account solutions, but I think that's still evolving."

Among the solutions that Wernette sees evolving are collectives, a vehicle of which many advisors may not be aware. "Collectives have been around longer than '40 Act mutual funds but they have tended to be used just by the big boys out there," he says. "The best way to describe a collective is that in essence it's a mutual fund that is only available to qualified retirement plans. Collectives are put together by banks and trust companies. They can't be mass marketed, which is one reason why you just don't hear a lot about them. You will see, for example, WalMart building its own collective for its retirement plan. From a simplistic perspective, you're creating a basket and you can put into that basket whatever you want." That could include things like ETFs, index funds, and other investment vehicles with low cost structures. Another advantage Wernette sees with collectives is that there are no hidden trading costs. He says that a mutual fund with an expense ratio of 1.25%, but with behind-the-scenes trading costs, that when factored in make the real cost closer to 2%.

"We're starting to see an evolution of collectives being pushed down to your average retirement plan," he says. "The challenge is that the average 401(k) advisor doesn't know a whole lot about them, it's hard to find information on them, there are not a lot of providers out there that have funds that they can make available in the day-to-day retirement space. The new ones that are coming out haven't been out long enough to have a track record."

Rehmann does have a collective, however, with a five-year track record which the firm is considering making available to other advisors it works with. Wernette says in the conversations they have had with other advisors so far the response has been favorable and he thinks Rehmann is in a good position to make a lot of noise about their five-year record, at least for a year or so until other firms catch up.

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