401(k) Plans Offer Advisors An Entrée Into Vast Market

By Cyril Tuohy
InsuranceNewsNet

Younger generations of retirement investors may not have big account balances for advisors to manage, but these new investors have something advisors crave: they all want investment advice and personalized attention.

The question for advisors is how to get that advice to them. The answer may be through employers and their 401(k) plans.

“Any financial advisor getting into the 401(k) market has to understand what employers are looking for: unfiltered and unbiased advice,” David Gray, head of 401(k) client experience with Charles Schwab Retirement Services, said in an interview with InsuranceNewsNet. “They want to hire somebody that they know does not have a conflict of interest, and that their fiduciary duties are transparent.”

“Plan sponsors are looking for financial advisors who will accept the fiduciary responsibility and put it in writing,” Gray added. “That is big for the plan sponsor.”

Gray also said that retirement plan sponsors often look to fee-only advisors so that there are no conflicts of interest or pre-existing biases that might compromise advisors.

More than six out of 10 workers (61 percent) want personalized investment advice for their 401(k), according to a recent survey commissioned by Schwab Retirement Services.

Usually a registered investment advisor’s first step into the 401(k) market begins by establishing a relationship with a plan sponsor’s human resources department. Perhaps an advisor has even built or maintained a relationship with the treasurer or chief financial officer, or even the chief executive officer, from a prior engagement.

Advisors might offer services to the plan such as choosing mutual funds from a fund family, or deciding which voluntary benefits like life and long-term disability insurance options are best for the plan sponsor, Gray said.

Offering voluntary benefits or mutual fund selections is the first step for the advisor toward providing a deeper level of advice, most likely to the company’s top managers since they are the employees who typically hold the largest 401(k) account balances.

Depending on the advisor’s business model, some advisors might then provide top executives with the one-on-one and face-to-face expertise the advisor industry is known for, though that can vary from one advisor to the next, Gray said.

Many advisors have neither the time nor the scale to serve hundreds of employees efficiently, and that is where employers can benefit from third-party advice, Gray said. Websites offered by Morningstar or Financial Engines, for instance, provide high-quality investment advice to employees.

These websites do a good job for the bulk of workers with thousands or tens of thousands of dollars in their company-sponsored plan retirement funds, Gray said.

Financial advisors have yet more opportunities to serve participants, particularly as employees say they are confused and suffer from what Gray calls the “paradox of choice.” This is when too many investment options lead to confusion, inconsistency and ultimately poor long-term investment choices.

Low-cost index funds are typically the best options for workers, Gray said, so that as much of the funds’ returns as possible get reinvested into the employees’ retirement plans.

There, too, advisors working with the company’s human resources managers have an opportunity to step in and pare down or replace the variety of funds available to employees. Advisors should keep in mind that when retirement plans offer more than 15 funds, the investment plan becomes unwieldy and counterproductive, Gray said.

As many as 52 percent of the 1,004 respondents in the Schwab Retirement Services survey said they were confused by 401(k) investment information, compared to 48 percent who said they were confused by health care benefits.

Another 34 percent of the Schwab survey respondents said they feel a lot of stress about choosing their 401(k) investments. The Schwab survey is the latest data showing that employees feel overwhelmed by the amount of information and the choices available to them in an employer retirement plan.

Ironically, though, more than 20 years ago when 401(k)s surpassed defined benefit plans to become the de facto retirement program for the vast majority of private-sector workers in the U.S., promoters of the defined contribution model said investors knew best how to allocate their retirement assets.

Two decades on, however, that doesn’t seem to be the case. Many young investors say they would prefer financial advice, according to the Schwab and other surveys, and the numbers would seem to bear them out.

Investors guided by experts consistently do better than investors who prefer to go it alone, and investors who receive advice also say they feel more prepared for their retirement than workers who don’t get advice.

All of which is good news for advisors in the 401(k) market, particularly now that 401(k) plan assets have grown to more than $3.5 trillion, or roughly 18 percent of the $19.4 trillion U.S. retirement market, data from the Investment Company Institute show.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].