When it was announced last spring that Hellman & Friedman, the private equity firm that already owned a majority stake in Edelman Financial Services, was throwing down $3 billion in cash to take 401(k) provider Financial Engines private, one prominent industry voice predicted the deal would present an existential threat to trillions of dollars in potential IRA rollovers.
“It may mean the beginning of the end of the giant 401(k) rollover bonanza that powers so much growth in the advice business today,” wrote Michael Kitces, a partner with Pinnacle Advisory Group and publisher of the Nerd’s Eye View blog.
Pairing Financial Engines, the largest 401(k) automated fiduciary investment platform provider that added more than 900 new plan sponsors in 2018, with Edelman Financial, one of the largest retail RIAs with 320 fiduciary advisors across the country, is a first-of-its kind arrangement.
The merger stands to crack a code industry has been wrestling with: How do you deliver comprehensive human financial planning directly to retirement savers in 401(k) plans?
“The great thing about providing the advice in-plan is that participants don’t need a rollover to get the advice relationship in the first place—they’ll already have it,” explained Kitces in an email.
As of the end of 2018, IRAs held $8.8 trillion in assets, or about one-third of the $27.1 trillion retirement market. IRA assets have increased an average of 10 percent a year over the past quarter century, according to the Investment Company Institute.
That growth has been fueled by rollovers from workplace retirement plans, ICI data shows.
In mid 2018, 42.6 million, or 33 percent of the country’s total households, reported owning an IRA. Among those households with rollovers in traditional IRAs, 57 percent had only rollover money in their accounts, meaning they have never made other contributions to their IRAs.
Can the merger that formed Edelman Financial Engines—substantial as it is—really disrupt all of that rollover momentum?
“In the long run, I believe Michael [Kitces] will prove to be correct,” Ric Edelman told BenefitsPRO in an interview.
“This has never been done before in the RIA industry,” he said of the merger. “It’s a game-changing event, and we have every intention of delivering on the potential the merger creates. That would be disruptive to industry, but in favor of clients, and in the end that’s all that really matters.”
In serving his retail clients over 30 years, Edelman has found they need and want help across all of their assets, regardless of whether they are held in qualified retirement plans or not.
ERISA has specific restrictions on when advisors can offer advice on assets not held by the advisor.
“That’s one of the reasons why advisors like to encourage IRA rollovers,” explained Edelman. “And they recognize they can earn compensation for doing so — compensation that could exceed what plan participants would otherwise pay if assets were left in 401(k) plans.”
Putting Buggy-Whip Manufacturers on Notice
That inherent conflict is eliminated under Edelman Financial Engines, said Edelman. Retirement plan savers’ ERISA-qualified assets are held under the Financial Engines arm. Fiduciary advisors on the Edelman side will be allowed to advise what to do with those assets upon retirement.
“If we are able to pull this off as we hope, there are a lot of buggy-whip manufacturers that will be put on notice,” said Edelman, referencing the disruption Ford’s Model T had on the horse and buggy industry a century ago.