Every day more than 10,000 Americans turn 65, and this flood of big birthdays will continue for the next two decades. It’s estimated that by 2030, 70 million people—almost a quarter of the population—will be 65 or older. By 2050 the number of senior citizens is expected to reach 89 million.
How will they retire? Even they don’t know. In fact, in response to a 2012 survey by the Employee Benefit Research Institute (EBRI) 67% of American workers said that they are behind schedule on saving for retirement.
Most advisors are already leveraging this demographic event and capitalizing on the opportunity to help affluent and high-net-worth clients plan for and manage their retirement years. The second, more subtle opportunity comes in the form of the advisor’s opening to broaden an existing wealth management practice by serving as a retirement advisor not only to the participants of a 401(k) plan, but also to the 401(k) plan sponsor.
If ever there was a group of people that needed advice and help with financial planning, it is American workers, who rely on their company 401(k) plans to fund their retirement. This is a large market, with more than $4.1 trillion in assets. Small- to medium-size 401(k) plans (up to $100 million) represent an excellent opportunity for qualified, quality advisors to render investment advice and serve as a fiduciary to the plan sponsor, and so serve the best interests of the plan sponsor and the plan participants.
Today, most small to midsize firms use proprietary, “401(k) plan in a box” type bundled solutions. However, much like the wealth management industry before it, the 401(k) industry is moving toward a more open-architecture solution.
This trend plays to the strength of independent advisory firms, which have long been familiar with open architecture and portfolio construction. But to be successful in the 401(k) arena, advisors really need more than portfolio chops—they need to have a scalable business. The investment aspect of advising plan participants and plan sponsors represents an area well within the core competency of most advisors. Where the challenges arise is in the areas of data aggregation, compliance, reporting and keeping abreast of the latest regulatory changes.
Probably the biggest initial hurdle for advisors new to the 401(k) arena is aggregating multitudinous data streams from different record keepers and third-party administrators. These agents incorporate 401(k) plan and performance data into books and records for plan providers and participants. That sounds simple, but it’s not. The debacle surrounding the launch of healthcare.gov is the most glaring example of what can happen when you lack a time-tested system that can smoothly aggregate data from an extremely wide range of sources.
Advisors can greatly facilitate their move into the 401(k) business by allying themselves with the right solution provider, one who can offer a holistic integrated platform, data aggregation and reporting. Outsourcing the data aggregation function can open up a new world of business opportunities, but advisors must be judicious in choosing the right partner for their practice.