January 14, 2013

Advisors Targeting ‘Orphan’ 401(k)s Can Reap Big Rollover Rewards

In rollover game, effective client-education programs can help institutions and advisors gain orphaned 401(k) assets

Trend-watching financial advisors are now offering a home to clients’ “orphan” retirement plans, and taking advantage of this often-overlooked opportunity to add to their assets under management.

These orphaned assets, which sit in 401(k) plans that get left behind and neglected when mass affluent professionals switch jobs, offer a huge opportunity to savvy advisors, according to Teresa Epperson, managing director in the Financial Services Practice at AlixPartners, a management consultant that recently conducted a study of dormant retirement plans.

Ten percent of mass affluent investors moved their money last year, to the tune of $750 billion, while 27% of mass affluent investors admitted to holding anywhere from $100,000 to $500,000 in dormant assets in what Epperson refers to as “orphan” 401(k) accounts. Advisors with effective client-education programs stand to add considerable sums to AUM if they hop on this trend, Epperson believes.

'A Big, Big Opportunity'

Teresa Epperson, AlixPartners“That $750 billion of money in motion is a significant number,” Epperson (left) said in an interview with AdvisorOne on Friday. “This is why financial institutions and their advisors should pay attention to retirement as a key theme. They should be talking more about this to their mass affluent customers because it’s a big, big opportunity.”

Larger institutions and banks typically fail to capture orphaned 401(k) assets because they don’t lay the groundwork of grabbing mass-affluent customers when they’re younger and opening smaller contributory IRA accounts, Epperson said.

More than 2,000 respondents were surveyed online by AlixPartners’ strategic research group, which found that saving for retirement among the mass affluent is consistently their No. 1 financial priority—scoring even higher than paying bills or settling up credit card debt. Not surprisingly, the survey results show nest egg savings are most important to people age 65 and above, who designate about 64% of investable assets for retirement. Even younger savers, age 35 to 44, designate 42% of their assets toward retirement.

Mass affluent customers move their money from one institution to another because they want to simplify their lives and get organized, Epperson said, adding that the institutions most likely to capture those funds are the ones that have already done the groundwork of creating a sense of trust with these savers.

“If one wants to be successful in the competition for rollover asserts, you have to be sure you already have a relationship with that consumer,” she said. “In the past, banks weren’t interested in contributory assets because the amounts were small due to limits on contributions. But we’ve learned that initial contributory IRAs, while small, are absolutely key to capturing rollover assets when that client is ready to roll.”

The $750 billion of money in motion falls into three categories:

1) From a 401(k) to an IRA

2) From an IRA in one institution to an IRA in another

3) Taxable transfers, where taxed brokerage or savings account assets get consolidated into a single institution

Relationship Building Is Critical

When a mass affluent consumer is ready to make a move, his or her money goes to the firm that has done the best job of building a relationship of trust with the client over time, Epperson said.

“When a customer perceives the firm as their primary provider for retirement solutions, the overall wallet capture for that client goes up significantly,” she said, noting that when mass affluent customers didn’t perceive their bank as their primary retirement relationship, the bank captured only 26% of investable assets. But if those customers considered their bank as their primary, that number rose to 74%. Similarly, investment firms saw a mass affluent customer’s investable assets rise from 42% to 70% if chosen as their primary provider.

Financial institutions and advisors that seek to capture more orphan 401(k) assets should work on improving their communications plans with customers, focusing on projecting retirement expertise through targeted direct marketing programs, Epperson said. She added that most mass affluent consumers start their shopping online, so the institution’s online presence should be strong.

Read Big Boost to 401(k) Roth Conversions in Fiscal Cliff Deal at AdvisorOne.

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