Many of the financial professionals I work with would like to develop a 401(k) practice, but wonder whether they have sufficient experience to do so. As a result, they may allow the opportunity to pass them by.
While it's important to have knowledge in this area, it's also important to have reliable partners - including third-party administrators, record keepers, ERISA attorneys and other service providers - who can help address a plan sponsor's needs and questions.
Outsource for expertise
Before venturing into the 401(k) business, identify the service providers you will need to create a powerful team. Multiple providers can offer diversity as well as resources to gain best practices. Coordinating with them in advance will help you build an offering that can be easily implemented.
When you have several relationships in place, you have the flexibility to address different plan needs and preferences. Plus, by pulling together a strong team, you increase the likelihood of receiving business referrals from your team members.
The question then is how to develop a 401(k) business that stands out in an increasingly competitive marketplace. I have developed four principles for developing a 401(k) practice:
1. Service
Successful relationships are those based on exceptional service. Setting clear service expectations at the onset of a relationship enables you and your client to evaluate your contributions based on the same criteria, while also helping you plan ahead to deliver services efficiently and cost-effectively.
This is the key to retaining accounts, and retention matters because helping a plan get up to speed may take a significant effort upfront. Once you have helped the plan sponsor set up consistent processes to manage the plan's needs, your role is likely to become easier over time.
A plan sponsor's main concerns are generally whether the plan meets the needs of employees and participants, and whether fiduciary responsibilities are being well-managed. Plan sponsors need information and resources that will assist them in accomplishing these goals. The more accurate, disciplined and dependable you are in providing these things - all components of "service" - the clearer your value as a financial professional, regardless of how the plan's investments perform at any point in time.
2. Education
The most visible element of your service to a plan is education, because it goes beyond your relationship with the plan sponsor and includes the company's employees. Done well, educating plan participants benefits everyone involved, including you.
The better you are at educational seminars and enrollment meetings, the more likely participation and total assets in the plan will grow over time, cementing your relationship and enhancing the plan's value to your practice.
What's more, you will be seen as an authority on financial issues, and highly compensated employees - or those who have received a personal windfall, such as an inheritance - are more likely to contact you about helping them with their own needs.
3. Participant experience
How often do the employees walk out of a participant meeting smiling, talking about the experience and feeling positive about their investment selections?
Make the experience fun by appealing to the five senses. Welcome the employees with the aroma of freshly baked cookies or bring in a popcorn machine. Play soft music while the group is gathering. Greet each person individually. Make eye contact. Shake hands. You want the employees to know they are welcome and an important part of the enrollment meeting.
A welcoming setting for the enrollment meeting is of utmost importance in establishing a feeling of trust. When the meeting itself feels like an important event and participants believe they play a significant role in the success of the plan, there is an increased interest.
Sponsors who take the time to involve participants by offering customized educational and enrollment tools, ensuring there's an understanding of the benefits and the ground rules, and offering one-on-one investment consultations instill a sense of safety and confidence.
Creating an environment of safety, trust and confidence can lead to increased participation and participant retention.
4. Your fiduciary responsibility
Understand exactly when and how you could be designated a fiduciary, and in what circumstances you might become one unintentionally. While some may want to act as fiduciaries, many do not. Have a clear understanding of what fiduciary responsibility involves and whether you are crossing that line. If you don't want to assume fiduciary responsibility, you never want to act, or be viewed as acting, unintentionally in a fiduciary capacity for purposes of ERISA.
To avoid being designated as a fiduciary, be sure to document instances in which you are presenting information on investment issues exclusively as education. It's vital that plan sponsors and fiduciaries understand that the information you provide should not be the primary basis for their investment and other plan-related decisions, and that they are solely responsible for such decisions.
Be sure that you provide information in a manner consistent with your firm's compliance policies and standards, with respect to the positioning of your services with plan sponsors and fiduciaries.
As more financial professionals recognize the enormous potential of the 401(k) market, we're seeing two distinct approaches emerging. There are those who have picked up some 401(k) business or have won several engagements, and see it not as a core offering but as a way to create balance in their overall book.
Then there are the plan advisers who focus day-in and day-out on building a strong presence in the defined-contribution market.
While the expanding 401(k) market makes dabbling in the market possible, the increasing competitiveness means that financial professionals who really want to continue providing these services will have to step up their game within their agency to include the 401(k) market as one of their core competencies.
Reach Bluestone, CFP, of Selective Benefits Group in Morristown, NJ, at
Securities and investment advisory services are offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Selective Benefits Group are not affiliated. Additional products and services may be available through Andrew S. Bluestone, CFPA‚A® or Selective Benefits Group that are not offered through AIC.
Longevity Annuities Add Pension Dynamics To Investment Plans
Employees willingly would give up a percentage of their salary for a guaranteed source of income during retirement, according to Bank of America Merrill Lynch data.
The firm's 2012 Workplace Benefits Report found that 82% of employees reported they would give up 5% or more of their salary for a reliable income during their later years; 42% said they'd be willing to give up 10% or more of their salary. With Americans living longer and uncertainty lingering in the investment marketplace, this suggests that retirement plan participants might be interested in buying guaranteed-income products to protect them financially in their golden years.
However, as advisers have noted, many of these options - such as longevity annuities and managed payout funds - are extremely rare options in employer-sponsored DC plans due to fiduciary and administrative complexities.
Longevity annuities are insurance products that offer participants the chance to defer portions of their account balances into an annuity that begins regular payouts later in life, usually age 80 or 85. Yet, only 16% of employer-based retirement plans currently offer "in-plan" lifetime income solutions like longevity annuities or managed payout funds, according to an Aon Hewitt survey.
More plan sponsors may include longevity annuities, or products with similar goals, in their plans if new government regulations are drafted to support their concerns and employees start demanding guaranteed-income options.
Currently, 401(k) and IRA participants need to start taking minimum distributions from their account by 701/2 years old. Because longevity annuities don't begin paying out until much later, a disconnect arises. If participants don't have enough money in their account because capital went toward an annuity premium, they often can't take the minimum distribution from the account.
The Treasury Department and Internal Revenue Service have proposed regulations to waive minimum distribution requirements for participants with money used to purchase a longevity annuity, if certain thresholds are met. Once proposed regulations are finalized and the minimum distribution issue is addressed, experts predict that longevity annuities will be used more in the IRA market.
Additionally, the IRS has proposed that Qualified Longevity Annuity Contracts allow individuals to purchase a longevity annuity from an IRA - or less commonly 401(k) - under a 25% or $100,000 limitation, whichever is less, without causing problems under the minimum distribution rules. In other words, investors could purchase more than the limitation but the minimum distribution requirements would still apply.
The American Benefits Council, in the hopes of easing this set-in-stone limitation, has recommended the IRS create a correction program for unintentional errors, similar to the Employee Plans Compliance Resolution System.
The benefit advocacy group also suggested that IRS and Treasury facilitate the purchase of QLACs outside of a plan without leakage. This means individuals wouldn't need to roll out their entire fund balance to buy the longevity, but rather subtract 25% or $100,000 toward an annuity premium, leaving the rest of the fund intact.
The products have a congressional advocate in Rep. Robert Andrews (D-N.J.). "Life expectancy is growing for so many people," Andrews says. "More people need to think about a guaranteed income beyond 85 years of age, so I think [longevity annuities] have value, but again I think it has value in a voluntary marketplace."
He insists the products should be coupled with "some kind of insurance fund paid for by the offerers of the annuity product that insures the buyer of that annuity against that risk," and that longevity annuities should be purchased through an insurance system that guarantees payment if something happens to the annuity offerer, thus protecting 401(k) sponsors and participants.
