Needy plan sponsors are green pastures for those with the right tools

February 23, 2010 — 6:17 AM UTC by Don Trone, Guest Columnist

1 Comment

Registered investment advisors have long eyed the 401(k) market as a green pasture. They know that there are vast reservoirs of assets in this retirement market and that they are well-suited to advising on them. Yet RIAs have stayed away from 401(k)s in droves because they believe that delving into that market is too difficult. The Securities and Exchange Commission is daunting enough, but living up to the dictates of ERISA just seems unnecessarily complicated and intimidating.

But in the wake of the economic turmoil, many financial advisors are opening their minds to new kinds of business. Maybe becoming a fiduciary to ERISA standards wouldn’t be a such a leap after all – if only there were an easier way to get up to speed on the whole subject matter. Another reason RIAs have shied away from 401(k)s is that they were unclear how they could add value that would justify charging fees. This list, which is based on an excerpt from the new book, 401(k) Ethos by Don Trone and Matt Hutcheson, makes clear the role of the RIA as they step into the 401(k) business.

401(k) sponsors have a multitude of needs that an investment advisor can meet. Some are looking for broad or narrow consulting services. Others are looking for an advisor to whom they can delegate responsibilities. Those advisors are willing to take discretionary responsibility – a term referenced under ERISA as a 3(38) Investment Manager. A consultant will benefit by adding the seven items listed below to his or skill set. A discretionary advisor needs to be a master of them.

1. Prepare to learn, lead and teach.

These three general rules for living apply to the 401(k) market. We’re not aware of any industry licensing exam that prepares advisors to work with 401(k) plans, so the advisors who take the time to learn about the retirement industry will have a significant leg up on competitors. The requirements for 401(k) plans are complex and intimidating; plan sponsors are looking for trained and experienced advisors who can “lead the way.” Your role will also include teaching, by giving plan sponsors additional information on how to prudently manage their 401(k) plan.

2. Develop an assessment procedure.

At the start of an engagement, you should be able to easily identify shortfalls and omissions in the plan sponsor’s procedures. Defined assessment procedures also enhance the professional stature of the advisor – you can’t diagnose and prescribe until you have done a thorough examination. Similar assessment procedures also should be used to monitor the activities of the plan on an ongoing basis.

3. Know how to document an investment decision-making process.

Fiduciary responsibility can be summarized in two words: procedural prudence – the details of the fiduciary’s investment decision-making process. Fiduciary responsibility (liability) is based on process, not performance. The plan sponsor is not expected to be able to identify the next best performing asset class or investment option; but, there is a requirement that the plan sponsor be able to demonstrate the due diligence procedures used in selecting and monitoring each of the plan’s investment options.

4. Help a plan sponsor deliberate internally to articulate goals and objectives.

Most 401k plan sponsors struggle with the articulation of the goals and objectives that they have established for the plan, and for the plan participants and beneficiaries. A knowledgeable advisor can play a critical role in leading decision-makers through this deliberative process.

5. Know how to prepare and maintain an IPS.

The preparation and maintenance of the plan’s Investment Policy Statement is, arguably, one of the most important functions performed by plan sponsors. When properly prepared, it’s the IPS that should outline how the plan sponsor is going to manage its fiduciary roles and responsibilities. Unfortunately, a large percentage of plan sponsors either do not have an IPS, or have an IPS that does not reflect how the plan’s investment decisions are being managed. That lack of knowledge and skill on the part of plan sponsors creates a clear need for an advisor.

6. Establish a system of transparency.

An often overlooked and misunderstood fiduciary requirement is the plan sponsor’s duty to control and account for all of the plan’s fees and expenses. Few retirement vendors provide the needed information, and the advisor who can provide such transparency is at an advantage.

7. Guide the plan sponsor through the safe harbor procedures.

Many of the key features of a 401(k) plan are voluntary – loosely referred to as “safe harbor procedures.” Though voluntary, they often can protect the plan sponsor from certain investment-related liabilities. Examples include: 404© procedures; QDIAs; Automatic Enrollment; and the Fiduciary Adviser provisions under the 2006 Pension Protection Act. The successful advisor will be the one who can navigate the plan sponsor through appropriate “safe harbor procedures.”

For more details about 401(k) Ethos, click here

Share your thoughts and opinions with the author or other readers.


Peggy McGillin said:

March 2, 2010 — 2:59 PM UTC

I have jumped in this market, your list is spot on. I had to figure it out the hard way, trial and error. It is very confusing at the start and even as a CFP, what you learn isn’t enough to know how to be in the 401(k) advice business. With commitment and focus it can be learned. Thank you

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