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Retirement Planning > Retirement Investing

Advisors and the Retirement Market: An Overlooked Opportunity

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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 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. 

As mentioned earlier, any good advisor should have the requisite skill set to meet with a plan sponsor, review the plan’s stable value funds, target date funds and mutual fund options and evaluate those funds. Making recommendations for adding or deleting funds from the lineup and providing help with asset allocation models so the plan sponsor can provide a more diversified portfolio experience for participants is business as usual.  But the advisor then needs to have a system in place to monitor those recommended funds and portfolios, replace them and rebalance the portfolios as warranted—and then be able to report back to the plan sponsor and plan participants on a quarterly basis.

Another area where 401(k) plan advisors need to be especially careful is around fiduciary responsibility. Taking a fiduciary role in advising individual clients is acknowledged in the industry as a best practice, and clients have come to expect it. When it comes to advising a retirement plan, however, regulations require that advisors declare in writing whether or not they are a fiduciary to the plan sponsor.

For advisors who operate under the RIA of their broker-dealer, the requirement for a fiduciary relationship becomes an issue. Broker-dealer representatives are not registered investment advisors and cannot serve in that fiduciary capacity. Under those circumstances the best solution is to outsource that fiduciary advice role to a qualified partner.

An outsourced fiduciary partner can offer two types of services, defined by their regulations: ERISA section 3(21) fiduciary advice and ERISA section 3(38) fiduciary management solutions. A 3(21) fiduciary advisor will provide research, due diligence, recommendations and ongoing advice on the investment options in the 401(k) plan to the plan sponsor;  a 3(38) fiduciary manager will assume discretion to manage the recommended investment options in the 401(k) plan.

Working with 401(k) plan sponsors and participants presents both tremendous challenges and opportunities for advisors. I don’t want to sound alarmist by talking about the retirement crisis, but the fact remains that there is a huge population that is aging but is not financially prepared for retirement. According to Financial Engines’ 2011 Survey of 401(k) Plans, 72% of Americans are not on track to reach their retirement income goals when they retire at age 65.  It’s no shocker, then, that according to a 2011 Employee Benefit Research Institute Retirement Confidence Survey, just 13% of working Americans feel confident that they’ve saved enough to maintain their pre-retirement lifestyle after retirement, and fully 74% expect to continue working after retirement to supplement inadequate savings. For many American workers, the money in their in 401(k) plans represents the bulk of their retirement nest egg, which makes proper planning and investment management more important than ever.

In the coming months we’ll address a wide range of topics that can help advisors better serve their 401(k) plan clients, including fiduciary responsibility; asset location; target date funds; transitioning clients from asset accumulation to income distribution; best practices in retirement planning, and helping clients determine if they can afford to retire.

Author’s disclaimer: For investment professional use only. Past performance is not indicative of future results. The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. Any mention of a specific security is for illustrative purposes only and is not intended as a recommendation or advice regarding the specific security mentioned. Diversification does not guarantee a profit or guarantee protection against losses.


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