By Chuck Hammond, AIF, PPC, CMFC
If you have business-owner clients, you probably get requests from them to help set up a retirement plan for their business. There are plenty of good reasons to do it: You want to satisfy a client need, it represents an opportunity to manage more assets, and if you do not assist them they will turn to another firm that may compete for more of the client’s investments. Taking over an existing plan can be attractive. Who wouldn’t want to convert a large existing account. But what about starting new plans? Are they worth pursuing?
There are many advantages for the business owner. The benefit can used to attract, retain, and motivate employees. There are benefits to the employees. The advisor can be rewarded with a stronger client relationship, more assets to manage, and the possibility of new clients from among the participants. Yet, advisors generally avoid start-up qualified plans. Are they worth it?
There is a large amount of due diligence that an advisor must perform to make sure a 401(k) plan is the right fit for the employer. What is the reason for starting the plan? Has anyone in the HR or Payroll departments run a plan before? Who will be the fiduciary, will those functions be outsourced? Will there be a committee? There is plan design, participant communication and of course on-going duties that are fiduciary in nature.
Then there is the actual RFP process. Gathering the data from each potential platform provider and presenting all of this to the potential Plan Sponsor. If the plan is given the green light, the advisor must invest time in on-boarding, enrollment and continuing service for the plan.
After all of that, start-up plans generate $0 in revenue. Based on the flow of investments (employer contributions and possible matching contributions) it can take quite a while for the plan to pay the advisor for all their initial work and ongoing service. The advisor can “lose” money on these plans.
What is the solution? Advisors certainly want to accommodate their clients and their centers of influence, but how? One common practice is to charge a flat fee for the plan. We commonly see $2,500.00 for a start-up plan. We are also beginning to see advisors charging 1% for the plan until it reaches a certain asset level. Those are both solutions to offset the cost for the advisor. However, the bigger question remains. Should you pursue them?
Many advisors pursue retirement plans purely for the wealth management, planning and insurance potential that may come from the participants in the plan. This part of our industry increases in complexity and regulation every year. I believe it is no longer an advantage to go after these types of plans unless you can specialize and scale. A better alternative is to partner with another advisor that is a specialist in this area. Determine which tasks and duties each of you will perform. You can even discuss potential ancillary business that may come from the plan.
Ten years ago, I would have said yes, go after retirement plans. Five years ago, I became less convinced that this would be a good idea for advisors. Now, it is a solid “NO”, not just for start-up plans but for any plans. Retirement plans are technical, highly regulated and require a level of expertise that takes time to develop. If you have a team where one of you can specialize, go for it. If you can grow and honor all the commitments to your clients, pursue them. If you plan on making this a solid offering in your practice, best of luck to you. If not, avoid making qualified plans a simple “add-on” to your business. Work with another advisor who specializes in this type of practice. Alternatively, explore what partnership opportunities may exist. It is possible that your OSJ, or Broker-Dealer may have resources. At TAG Advisors, for example, I am part of a team dedicated to the development of qualified plan business. We work with financial professionals to enable them to offer retirement plan services to business owner clients without becoming experts themselves.
There are important reasons to address the qualified plan needs of clients. And the only practical way for most advisors to satisfy them is to partner with specialists. This is not a service to pursue part-time.
Chuck Hammond is Director of Qualified Plan Strategy at TAG Advisors. He is responsible for outreach, education, and marketing and support on qualified plans, including vendor selection and monitoring. He is an active retirement plan advisor whose practice manages 26 plans. Hammond is perhaps best known as founder of The 401(k) Study Group, a community of 15,000 financial professionals involved in corporate retirement plans.
TAG Advisors is where entrepreneurial advisors thrive. It is an OSJ organization within Cambridge Investment Research, Inc. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment advisory services offered through Investment Advisor Representatives of Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Each company is independently responsible for the products and services they provide. Representatives of Cambridge Investment Research, Inc. do not provide tax or legal advice in their roles as registered representatives. Cambridge and TAG Advisors and its subsidiaries are separate entities.