This is why, according to Cerulli, just 4% or 13,000 of 288,000 financial advisors nationwide are specialists—defined as those with at least 50% of their revenue from defined contribution plans—in contrast to the 63,000 with 15% – 49% DC concentration and the rest, with minimal exposure.
That said, the landscape may be changing, in part due to an explosion of small business retirement plans.
First, states including California, Oregon and Illinois are requiring most companies to offer a retirement plan—at least 44 states have either approved such legislation or are considering it. Second, the Secure 2.0 Act subsidizes most, if not all, costs for entities with 100 or fewer employees. Third, technology and schemes like pooled employer plans are making it easier for less-experienced advisors to start a plan and outsource much of the work and liability.
Still, the economics of DC plans are typically not attractive if plan fees are the advisor’s only source of revenue, especially for start-up and smaller plans. DC plan sponsors have a fiduciary responsibility to ensure that fees are reasonable, which causes many to pursue the cheapest options.
Carrot and Stick
For advisors, the “carrot” is to use the plan as an opportunity to find wealthy prospects. Morgan Stanley CEO James Gorman anticipates that the workplace will become the firm’s primary place to gather new assets over the next 10 years.1 Sure, most DC participants and employees are not attractive to the typical wealth advisor, but extensive “hidden wealth” is accessible through the workplace, along with “Henrys” (high earners not rich yet) who could be a source of future business. A plan advisor has the advantage of the employer’s endorsement and unique access to employees, as well as data from the recordkeeper, payroll and health care systems, making prospecting easier.
The “stick” is that, if a wealth advisor’s client asks for help to start or service their DC plan, by refusing, the advisor could disrupt the business relationship. And while most wealth advisors have avoided the DC market, most retirement plan advisors are eager to offer wealth services.
Finally, the Department of Labor’s fiduciary rule is likely to put a damper on IRA rollovers as more in-plan retirement income options are offered and more plan sponsors become eager to retain assets. Various tools allow a wealth advisor to help clients manage their DC plan assets, but clearly the plan advisor has an advantage and may be able to convince participants to keep their assets in the plan, where investment costs are likely to be cheaper.
All of this adds fuel to the convergence of wealth, retirement and benefits in the workplace, led in part by the growth of small plans and the likelihood of in-plan retirement income. Many wealth advisors rely on larger firms to get prospects and very few can afford mass-marketing campaigns, which is why lead-generation firms such as SmartAsset have grown rapidly.
The bottom line? We suggest that wealth advisors not overlook DC plans, which have become easier to manage, as a potential source of new wealth business or even as a hedge to keep others out of their relationships.