A very limited number of registered investment advisers work with defined contribution plans, according to a survey of plan sponsors by TD Ameritrade, only about 5%. That number makes sense if you look at the retirement plan marketplace going back seven to 10 years, says John Newman, managing director of retirement plan services for TD Ameritrade Institutional in Denver, because the small-plan market, plans with up to $10 million in assets, has been dominated by investment product providers like insurance companies, mutual fund companies and broker dealers.

“Those are entities that have large sales forces and they have a top-down distribution method where many of those proprietary product solutions are being pushed through large sales teams,” Newman says. “Independent RIAs are not part of that structure so they have not taken to the marketplace in the same numbers as non-independent advisers affiliated with investment products.”

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That is slowly changing because of fee disclosure rules that came out in February 2012, with more emphasis on plan sponsors and the overall cost of retirement plans, including the cost of investments, he adds.

“Fee disclosure put fee-based RIAs on more of an equal footing – an RIA-provided solution vs. a mutual fund or insurance company relying on investment products to pay for the cost of the plan,” Newman says.

In its survey of plan sponsors, TD Ameritrade found that only 28% of plan sponsors use RIAs.

So why would plan sponsors want to work with an RIA?

The main reason is that RIAs use open investment architecture solutions from which they can create investment plan menus. These platforms don’t have ties to proprietary products. They find the best performing and best compilation of investment options for a menu or can work to make the lowest cost investment menu available.

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The second reason plan sponsors may find the RIA model attractive is that plan sponsors have to live up to their ERISA fiduciary responsibilities, which can be a real challenge, especially for smaller plan sponsors.

“It makes sense to have a partner with you as a service provider that is holding themselves out as an ERISA fiduciary provider. That message resonates with advisers,” Newman says.

TD Ameritrade has found in numerous studies that plan sponsors don’t work with RIAs because they are not aware of the fiduciary RIA model that is available to them.

“One of the takeaways for advisers is to do a better job of marketing themselves to the general plan sponsor marketplace so they are more aware of what that service offering is,” he says.

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“It is an emerging trend. More plans are working with fee-based advisers who use a fiduciary model. With the way fee disclosure regulations evolved and the ERISA fiduciary regulations are expected to evolve over the next year and with the continued growth of the size of 401(k) plans in total and individual account balances, we will see that gain steam as we go forward,” he believes.

As plans move up into the $5 million to $10 million asset arena, they can save money by working on the cost of their investment menu.

“Plan sponsors view the cost of the plan as the fees they are paying to service providers and are viewing that as separate and distinct from the cost of the investment options offered to plan participants,” says Newman. “They are intertwined. Investment options are 90% of all expenses of the plan. Advisers succeed when they are able to get a plan sponsor to look at the overall cost of the plan, including the cost of investment options. They can use open architecture to drive the cost of those investment options down.”

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Working with RIAs also allows plan sponsors to include exchange-traded funds within their plans, since these are more available through open architecture plans.

It has only been in the past few years that ETFs were available as part of a plan’s core investment menu, he says.

TD Ameritrade has been offering ETFs to its retirement plan clients for four years. The reason it has taken so long to adopt ETFs in the 401(k) market is that it took time for providers to figure out how to work ETFs into the operational structure of their retirement plans. There has been incredible growth in plans using ETFs in their menus, Newman says.

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Plan sponsors say performance reporting, participant advice and fiduciary education are the most valuable support services, according to the TD Ameritrade survey, and two-in-five say their participants want more one-on-one advice.

RIAs provide one-on-one participant advice, fiduciary support and plan sponsor education at nearly twice the rate of other types of advisers, the survey found.

Paula Aven Gladych is a freelance writer based in Denver.

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