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Retirement Planning > Retirement Investing

$4.7 Trillion 401(k) Market ‘There for the Taking’ for RIAs

By Bernice Napach

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No matter what happens to the Labor Department’s fiduciary rule, RIAs have the opportunity to expand into 401(k) market, primarily for small businesses.

(Related: What’s Next for DOL Fiduciary Rule)

RIAs currently manage about 10% of the $4.7 trillion 401(k) market, when they could manage a lot more, said Skip Schweiss, who oversees TD Ameritrade Institutional’s Retirement Plan Services platform, citing data from the Investment Company Institute.  

He expects that opportunity will continue to exist for advisors even if the Labor Department’s rule, which requires that managers of 401(k) plans under $50 million be fiduciaries, is delayed or repealed.

(Related: DOL Wins Fiduciary Rule Case in Texas)

“Advisors are already fiduciaries. They will benefit from the public attention given to fiduciary advice,” said Schweiss.

“Clients and plan sponsors are becoming more educated about fiduciary advice and the importance of it, and there’s a lot more upside when only 10% of advisors are actively pursuing the space,” said Schweiss. “It’s a wide open competitive landscape that there’s for the taking.”

The target market for advisors, says Schwiess, are 401(k) plans with assets between $1 million and $10 million and 10 to 100 employees, which account for about 90% of such plans, in terms of their numbers.

“That’s a natural market for RIAs,” said Schweiss. “Between $20 million and $1 billion [plan size], the “competition gets really fierce.”

But below that ceiling advisors may have an advantage. “We see every day when an advisor goes up against an entrenched insurance company in almost every case the advisors can cut the cost of the plan in half,” said Schweiss.

Firms having the most success exploiting the defined contribution market are relatively large, with $1 billion in AUM, said Schweiss, noting that they are capable of dealing with the complications of managing an ERISA retirement plan, although he’s also seen smaller firms succeed in that space.

Cerulli analysts said that those advisors already generating more than half their revenue from retirement plans, excluding IRAs, are those best positioned to take advantage of opportunities in the retirement market.

The attraction for any wealth management advisory firm pursuing the 401(k) market is the two-way street that opens up for the firm. Advisors can use individual clients as a gateway into the 401(k) plan and the retirement plan as a gateway to more wealth management clients, especially the higher paid executives. Indeed, Cerulli analysts said that among advisors who derive less than half their business from DC plans, 43% saw their wealth management clients as a potential conduit to new retirement plan business while 45% viewed DC plans an as opportunity to generate more wealth management clients.

But advisors need to be careful about advising plan participants on rollover IRAs, said Schweiss. Even before the latest fiduciary rule, advisors who provide discretionary investment advice to DC plans and want to recommend a rollover into an IRA account would be subject to ERISA rules and a prohibition on self-dealing.

Given the many ERISA rules covering defined contribution retirement plans, Schweiss recommends that any advisor who wants to get more involved not in DC plan management not do so as a part-timer and consult first with an attorney who specializes in ERISA law.

He also notes that advisors should not expect to charge their often usual 100 basis-point fee on DC plan assets. Fees are more likely to run between 25 and 50 basis points and could possibly reach 75 basis points. But the account size will likely be in the millions. 

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