With the new 403(b) regulations, issued in July 2007, the environment in which 403(b) arrangements are sold and serviced by advisors may change substantially.
The new rules, the first in over 40 years, will dramatically increase the employers’ role in governing its plan, to include the monitoring and coordination of all plan contributions, exchanges, hardships and loans (for all investment providers), plan investments, documentation, administration and participant disclosures.
Historically, advisors sold 403(b) plans directly to education, healthcare and other tax exempt organizations. In many cases, a number of providers were granted a payroll slot as long as a minimum number of employees expressed interest in using that provider. In addition, since employers often viewed the plan as a voluntary benefit, they generally left the decision on which provider, product and advisor to use, up to each employee. This is especially true with non-ERISA 403(b) plans.
Therefore, in many organizations, different advisors offered different products and competed for participant dollars. Typically, advisors made contact with eligible employees via an organization-sponsored Benefit Fair (usually once or twice a year), at specific times onsite, or by calling employees at home and setting up meetings.
Now, though, the new regulations may force employers to interact with providers proactively in terms of compiling data on investments, plan and participant assets, in-service withdrawals, transfers, and loans, so they can perform the required monitoring, management and reporting.
Many people believe consolidation of plan providers may result and, over time, lead to an environment of exclusive provider relationships. In the larger healthcare market, where many 403(b)s are under ERISA guidelines, this has already happened with many plan sponsors migrating to exclusive provider relationships and the employer overseeing provider selection and all communication, education and enrollment activities.
Many employers may recognize the inherent difficulties in dealing with a large number of multiple providers. Those who do will seek providers (or a single provider), or a third-party administrator that can provide plan document, comprehensive administration, compliance services, investments and communication services that may be required to manage a true employer-sponsored retirement plan. Employers will look at providers to handle their plan in a more holistic manner.
The same is true of how employers will view advisors that provide plan services.
To date, unless advisors are selling a new plan to an employer or working with a plan with employer contributions, they have not had to have in-depth 403(b) plan knowledge. They have primarily dealt at a participant and a product-specific level.
But with the new regulations, in addition to product knowledge, advisors will have to focus on educating employers on plan and regulatory compliance issues as well as how to make decisions on plan providers.
As employers consolidate providers, advisors representing one company and its products must now have the ability to convey the company’s full 403(b) plan value proposition and solution. In addition, they will have to expand their centers of influence and relationships at the employer-level, as they will now need to work with senior finance executives, investment and pension committees, and third-party consultants in addition to the human resource and benefit staff members they have worked with historically.
Due to this greater complexity, working with an employer with an existing plan or new plan prospect may take much longer than the typical product sale to an employee. Winning new plans may also require multiple meetings and formal requests for proposal; ultimately, it may also require a formal presentation to a board or committee charged with deciding which providers (or provider) to select to offer the retirement plan.
The new sales dynamic will likely require new skills and education on the part of the advisor.
Advisors may have to work more interactively with a plan provider’s administrative, pricing and marketing staff, for instance. This may lead to less control of the sales process than in the past.
In addition to selling themselves, they may need to sell the company they represent and all of its capabilities. Relationship-building will always be critical to the sale but may no longer be the most important aspect in the decision-making process.
Another change will be the active involvement of third-party consultants hired by employers to help them make plan provider decisions. This new constituency may demand newer and less expensive products and services. This could lead to lower compensation for the advisors who service the plan or a demand for some form of salaried or flat dollar compensation.
Greater employer oversight and involvement could also lead to demand for better and more consistent plan and investment education for plan participants and, ultimately, advice for participants who do lack the sophistication to make deferral and investment decisions on their own.
Advisors who are already adept at plan-level education and are proficient in the use of retirement gap analysis and asset allocation tools may be much better positioned than representatives who simply handle product sales.
The new regulations will likely result in more employer focus on getting more participants to enroll in a retirement plan. This will likely cause an increase in the number of enrolled participants for each surviving provider. As advisors adjust to the requirements of selling to employers, they will become indispensable to the employer, resulting in stronger relationships with employers and better overall sales.
Advisors must be prepared to help employees answer various questions (see chart). Those who can do this and also offer valuable advice, either as a Registered Investment Advisor or through access to participant advice tools, should be in a stronger position to maintain participant relationships and become a life-long trusted partner of the organization.
Participants also need guidance on what to do with accumulated retirement plan assets. Trusted advisors are uniquely positioned to help evaluate plan rollover or distribution options in the context of an overall financial plan.
The ability to continue the participant relationship into retirement is a real advantage for advisors. This will strengthen the relationship and it can help provide additional compensation through ongoing financial planning fees or additional product sales.
John Arant, CLU, is head of business development and strategic partner relationship management-employer markets at Lincoln Financial Group, Scottsdale, Arizona. His e-mail address is firstname.lastname@example.org