As 401(k) plans have supplanted pensions as the foundation of employee retirement savings, advisors too are transforming their practices to capitalize on the new growth prospects found in retirement plan advisement.
Understanding the opportunity is half the battle. But if you are looking to build out your 401(k) practice, knowing the pulse of the retirement plan space is critical to offering a competitive service.
In speaking with our retirement plan advisors across the country and surveying the data of 43,000 retirement plans, we've identified a few things we think retirement plan advisors need to know about the current marketplace.
1. HOW TO PROSPECT
If your personal wealth management practice is centered on helping individuals plan, think of 401(k) plans as group planning, to some extent.
How should you prospect for new business on the retirement plan front? It may be an obvious starting point, but look first at your own practice. How many business owner clients do you serve today as wealth management clients? If you haven't approached them about their corporate retirement plan needs, it's a safe bet your competition has.
Beyond business owners, advisors should evaluate their full client roster. Identify those that can be considered "centers of influence" at their workplaces; think upper-level management and long-standing employees.
To uncover new business leads, advisors who've already established a practice in corporate retirement plans report great success hosting educational seminars for local business owners. Retirement is complicated, so knowledge and understanding is paramount. If you can share your expertise, there may be no better way to grow your practice.
2. HOW YOU'LL BE COMPENSATED
Historically, advisors received their compensation as part of the investment vehicle used in a corporate retirement plan, either in the form of 12(b)-1 fees or commissions.
With the growing emphasis on fees and transparency, however, more advisors have begun to transition their practices to a RIA model, in which they enter into a direct fee agreement with the employer.
The fee-for-service model opens up a whole new universe of investment products, such as collective trust funds, ETFs and lower-cost (institutional share class) mutual funds. Advisors also gain a completely agnostic viewpoint on the investment menu since their compensation is unrelated to the investments selected for the plan.
3. WHAT EMPLOYERS EXPECT
While employers still rely heavily on advisors for assistance with a plan's investment menu, they increasingly need help with the actual service to be provided to their employees.
As companies focus more on setting employees up for overall retirement readiness, employers want an advisor who will look beyond enrollment and help workers evaluate savings rates and asset allocation.
Helping employees create and implement a strategy designed to replace a sufficient amount of income in retirement is the big picture goal.
4. HOW AUTOMATED OPTIONS HAVE CHANGED
Employers want advisors to simplify retirement saving for themselves and their employees. The easiest way to simplify the process is by removing as many barriers as possible. And typically, the first hurdle is, "Should I join the plan?"
While traditional employee education and enrollment meetings can work, increasingly advisors are starting to embrace automatic enrollment to overcome this initial hurdle. The average employee would rather be told what to do rather than being asked. With automatic enrollment, employees still have decisions to make, but advisors can put them on a positive course by defaulting them into the plan; they have to make a conscious decision to opt out.
Another by-product of automatic enrollment is the impact on the overall plan participation rate. According to our data, plans with automatic enrollment average 21% higher participation compared to plans without it.
You may also want to encourage employers to default their employees into the plan at more aggressive savings rates -- in the range of 6% to 10%, for instance, rather than the current average 3% default setting.
Auto-escalation is another successful strategy that can boost savings incrementally, helping employees reach necessary savings rates without drastically impacting take-home pay all at once. If you think about benefits in general, there is a general understanding that the costs of benefits tend to increase every year. So why shouldnt the cost of retirement -- the employees' savings rate -- also go up? Auto-escalation is a great way to help employees ease into higher savings rates.
The retirement plan industry continues to evolve at a rapid pace. Advisors looking to engage in the retirement plan market need to keep apprised of changes to stay competitive and contribute to employers and employees goals of retirement readiness.
Mike Narkoff is senior vice president of sales at independent retirement and college savings plan provider Ascensus.
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