Until recently, wealth advisors who did not specialize in retirement plans were told by their broker dealers, RIAs and the industry not to dabble in 401(k)s. Most of these advisors were not interested anyway, as plan-level revenue tended to be low and declining, while the work was complex, burdensome and fraught with fiduciary liability.
That message has changed for several reasons.
Due mainly to state mandates and helped by Secure 2.0 tax credits, Cerulli believes that the number of DC plans will increase by 50% to over one million by the end of the decade.1 In many small businesses, employee DC plans are managed or owned by someone who is a client of the wealth advisor. Beyond a desire to provide assistance to an existing client, advisors are realizing that, by helping with the establishment of a plan, they may find new clients. For an advisor, servicing a plan provides an avenue for developing relationships with “HENRYs” (high earners, not rich yet) while at the same time keeping a competitor from gaining access to those relationships.
Experienced retirement plan advisors (RPAs) already know that DC plans are a great way to potentially meet new clients for their wealth or financial planning practices—something some wealth advisors with even just a few plans understand.
The question is, how should wealth advisors navigate the DC market?
Partnering Up
Few are likely to become as knowledgeable about DC plans as a specialist RPA given their focused effort on the wealth business, which they know quite well and is likely more profitable. Advisors without this expertise and without the wherewithal to hire internal resources may want to look to third parties and outsourced fiduciaries for help.
When it comes to a DC plan, advisors can typically play an active role in three main areas:
- Onboarding or starting the plan
- Servicing the plan and participants
- Helping separated employees with retirement income and rollovers
Most wealth advisors will not want to take on ERISA investment fiduciary status, so they should find third parties accustomed to 3(21) or 3(38) co-fiduciary duties. Many advisor home offices will also perform these fiduciary roles.
Importantly, advisors will likely want to identify DC plan participants to discuss potential wealth management and rollover opportunities. They will need to engage in marketing and branding to participants, identifying those who might make good wealth clients—potentially including those with health savings accounts or larger balances/salaries. Receiving timely notification of events such as termination or separation can be an additional advantage.
According to Cerulli, advisors with a relationship with a DC participant before separation are much more likely to be hired to assist with the rollover.1 Once identified, many wealth advisors have resources to manage IRA rollovers.
In the DC market, the advisor’s number-one partner is typically the home office—particularly if it has dedicated retirement research professionals. The latter will generally find and integrate the best tools, and work with recordkeepers and third-party administrators (TPAs) that focus on small and start-up plans.
Advisors without dedicated home office support can look to partner with a TPA and/or recordkeeper offering tools and fiduciary services. Trust is crucial, given the sensitive nature of client relationships. If assisting participants with rollovers and wealth management is critical to an advisor, he or she may not want to partner with a recordkeeper holding similar ambitions.
Looking Ahead
An explosion of small and startup plans appears to be coming. Many wealth clients who own or manage a business may be looking for help. Where needed, outsourcing to a trusted partner can help advisors effectively manage time, cost and resources in seeking to capitalize on this opportunity.
