Mention 401(k) to financial advisers and most will say that they lack the knowledge, resources and time to compete with the relative handful of those who specialize in retirement plan sales.
But you can turn this perceived weakness into strength, by delivering something those “specialists” typically don't, won't or can't: the transfer of fiduciary responsibilities for the hiring and firing of investment managers from plan sponsors to an ERISA 3(38) specialist.
Fifteen years ago, The TCW Group Inc. — a money manager that didn't specialize in 401(k) plans — developed a delegation strategy that changed the industry. By using an independent third party to allocate proprietary funds, TCW, Ibbotson Associates Inc., and later AIG SunAmerica Inc., gave specific advice to participants who wanted answers, not tools and education.
JPMorgan Chase & Co. calls these participants “delegators” and estimates that they represent 90% of employees. The TCW/SunAmerica delegation model was codified in the 2006 Pension Protection Act.
Today, lifecycle/target date and lifestyle/ risk-based funds are on every 401(k) platform because they let a large majority of participants who never asked to do it themselves turn over fund investment decisions to a professional money manager.
Here is the problem: The PPA allows participants, not plan sponsors, to delegate fund selection responsibilities.
Fund companies aren't taking discretion over a roster of proprietary funds because either they can't (self-dealing is a prohibited transaction under the Employee Retirement Income Security Act of 1974) or they won't (it would interfere with the specialist 401(k) advisers that drive their revenue).
The handful of advisers who specialize in 401(k) plans add value by helping their sponsor clients evaluate thousands and thousands of mutual funds. They load up plan sponsors with fund fact sheets, prospectuses, data points, scatter plots, MPT stats, and quartile charts.
Although they often sign on as fiduciaries for this advice, they typically leave the final decision to their clients. In the end, it is the plan sponsor who is the fiduciary for the actual selection of the 10 to 15 style-box funds that will be made available to participants.
If the vast majority of advisers and the vast majority of participants don't see themselves as 401(k) specialists, guess what? The vast majority of plan sponsors don't see themselves as 401(k) specialists, either.
Given the option, these plan sponsors would prefer to delegate the selection and monitoring of those 10 to 15 style-box funds to a contractually appointed fiduciary, especially when they are made aware that they are personally liable for the plan's fund roster decisions.
This creates an opportunity for a new breed of “delegator-advisers” to deliver answers, not just advice. These delegator-advisers work with ERISA 3(38) investment managers who will take fiduciary discretion to hire and fire the funds on the plan roster.
This is a higher level of safety because, unlike 3(21) fund advice, the fiduciary delegate, not the plan sponsor or adviser, is ultimately responsible for selecting and monitoring the roster funds.
Although not a part of the PPA, Section 405 of ERISA allows such delegation of fund selection and monitoring to what Jason Roberts of Reish & Reicher, a leading industry spokesman on ERISA plans, calls remote fiduciaries. These are ERISA Section 3(38) investment managers who are qualified, non-conflicted, capable, and willing to provide fund roster selection, and often allocation.
The remote fiduciary must be a bank, insurance company, or registered investment adviser.
Here is how you sell it: Call your clients and prospects who are business owners and influencers and tell them that changes to 401(k) rules make it wise to have an independent fiduciary review their plan. Have your fiduciary partner review the plan's Internal Revenue Service filings for potential issues and generate a document that details exposures and issues, if any.
Where there are fee, transparency, or liability exposures, the report should list the many steps the sponsor should take to fix the fund roster problems in-house. The long and onerous list is followed by a simple offer inviting the sponsor to delegate the job to the ERISA 3(38) manager.
When presented in this way, those plan sponsors who aren't retirement-savvy and who didn't know the extent of their personal liability will either be open to receiving a formal proposal with a fiduciary roster or ask why you didn't call sooner.
Michael Case Smith is target date manager at Avatar Associates LLC.
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