Not Knowing Your Plan’s Fees Can Cost You Plenty

By Allison Brecher, General Counsel, Vestwell

In order to make good investment decisions, it’s important to be informed. Yet one of the more impactful components of any retirement plan is also the area where employers and participants tend to feel least clear: plan fees. While fees are not the only consideration when creating your portfolio or selecting service providers to the plan, high fees can erode retirement savings for participants and can create fiduciary – ie: personal – liability for you, the plan sponsors.

Despite the risks, many sponsors don’t take the time to carefully examine their plan fees or, worse yet, needlessly increase their risk by overpaying service providers who may be charging “hidden” fees. What you don’t see can hurt you, but what questions should you ask to prevent these pitfalls?

First, let’s understand what services are being provided to a typical retirement plan. There are three general categories:

Investment advisory – investment advisors select the investment lineup that they believe is suitable for the plan.

Administration  – recordkeepers and other service providers keep track of the transactions in your account, such as payroll deductions and employer contributions, and make sure the plan is operated in compliance with legal and regulatory requirements.

Direct charges – participants and sponsors are charged for services specifically provided to them, such as for loans, hardship withdrawals, or amending the plan.

All of these services are necessary to successfully operate a qualified retirement plan and, while there is nothing wrong with getting paid, the challenge is to understand how these service providers get paid, the reasonableness of the fee in light of the value of the services, and whether the fee has been disclosed. Unfortunately, it is often not as simple as just asking the service providers because these fees can be embedded in the expense ratios of the mutual funds offered in the investment lineup.

Given all this, how can you get to the bottom of what you’re actually paying and what you’re getting in exchange for those fees?

1. Start with the documents

You should have just received year-end fee disclosures that list all of the expenses paid by the plan. Those notices and the plan’s benefits statements will help you understand the total plan-related fees charged to their account. The plan administrator should be able to provide a list of all direct service charges. All of the expenses paid by the plan or individual participants should be clearly itemized; if they are not, you should probably ask why.

2. Understand share class

Very large employers get the benefit of being able to invest in institutional share classes, which often have lower costs. Some mutual funds create a share class specifically for smaller retirement plans, called Sub-TA fees, which include the fees paid to recordkeepers, plan administrators, or other providers. In other words, the providers’ fees are aggregated with the mutual funds’ expenses and therefore make it impossible for plan sponsors to separately identify and benchmark them. However, you can ask for them to be itemized separately. If you don’t know or understand your share class, you should find out. If you are in one with a high cost, you can insist that your plan be placed in one with lower expenses.

3. Understand conflicts of interest

If your plan provider is an insurance company, there is a good chance your plan’s investments are variable annuities and not mutual funds. Variable annuities are mutual funds owned by an insurance company “wrapped” or protected by an insurance policy, thus increasing expenses with “wrap fees,” surrender charges, or sales commissions in the process. Those fees can turn a low cost mutual fund into an expensive and illiquid investment. The same could be true for plans supported by a mutual fund provider, which has a built-in incentive to use its own funds as part of the investment lineup. Conflicts of interest are not inherently wrong; they just must be disclosed so that the plan sponsor can make informed decisions.

4. Ask about revenue sharing

While the word “kickback” could make you cringe, revenue sharing is just that—a payment made by a mutual fund to compensate service providers that use their funds. Salespeople, brokers, and insurance agents may receive finders’ fees for bringing new business to the mutual funds or negotiated loyalty incentive compensation. Regardless of the type of fee, they are all revenue sharing and they increase the investment’s expenses and reduce investor returns. Sometimes these fees are disclosed as 12(b)-1 fees, but sometimes fund companies pay different levels of fees through multiple share classes. You should ask your investment advisor or read the prospectus. Don’t overlook footnotes about how your plan expenses “may notinclude any contract-level or participant recordkeeping charges. Such charges, if applicable, will reduce the value of a participant’s account.” That is likely a red flag telling you there may be hidden fees.Ask your investment advisor whether it is receiving 12(b)-1 fees, the annual value of those fees, and whether your same mutual funds can be purchased for a different share class with lower revenue sharing fees.

5. Investigate transaction fees

These fees can be especially difficult to understand, yet they are one of the largest expenses that a participant can bear. Every time a mutual fund manager buys or sells the underlying securities within a mutual fund, there is a cost to the trade. Actively managed funds have higher transaction costs than passive funds, like index-based funds, and the participants’ investment returns are reduced by the cost of those trades. While transaction costs cannot be avoided entirely in actively managed funds, they can include brokerage commissions and other compensation paid to the service provider that should be scrutinized. Transaction fees can be found (often with some difficulty) in a fund’s Statement of Additional Information and annual report.

So how are the fees justified? There is nothing wrong with compensating service providers; again, they perform necessary services to successfully operate a qualified retirement plan. But sponsors must ask what services justify these fees and whether the provider yielded material results for participants and beneficiaries. In short, the question fiduciaries should be asking is:  Do these fees exist to pay for reasonable, legitimate, and valuable services that benefit participants of qualified retirement plans and enhance their retirement security?  Or do they exist to support the financial services industry at the expense of participants?

You can largely avoid these issues altogether by investing in lower cost mutual funds, like Exchange Traded Funds or Target Date Funds, and consider using service providers that are not financially incentivized to use certain mutual funds as plan investments. You should be asking yourself the ultimate question regularly:  Have I properly investigated and paid only those fees that were appropriate and reasonable? Hopefully after addressing the questions above, your answer will be “yes”.

 

Plan Sponsor Record Retention Guide

retention guide

Between hiring, benefits, meetings, and day-to-day management, employers have a lot to do in addition to being fiduciaries. As several sponsors approach year end for their plans, help them prepare by sharing this simplified record retention guide.

Regulatory Year in Review

regulatory

By Peter Kennedy, Special ERISA Advisor, Vestwell

2018 continues to be a year of change – – on the regulatory and legislative fronts. From the now-abandoned DOL fiduciary rule to several other bills making their way through Congress, plan sponsors and advisors should understand how these legislative updates affect them and their qualified retirement plans.

The DOL Fiduciary Rule

Among all of the changes in the retirement industry this year, perhaps the most significant was the DOL’s Fiduciary Advice Rule (A.K.A., “the Rule”).  After much debate, the Fifth Circuit Court of Appeals vacated the Rule in its entirety. And, at least for the time being, advisors are once again subject to the pre-existing rules as to what constitutes “investment advice” under ERISA.

What exactly are these pre-existing rules and what do they mean for advisors and their retirement business? We’re glad you asked. Many advisors under the old 5-part test for investment advice regularly helped clients with 401(k) plan design, investment menus, plan education, and other matters – all without the assumption that they were fiduciaries to the plan. The Rule was meant to alter that assumption by characterizing most types of advice to retirement plans and IRAs as “fiduciary advice.” That meant an advisor would have been subject to significant fiduciary liability, but since the Rule has been vacated, advisors are once again free to offer plan advice with less concern for legal ramifications.

Although not directly related to retirement plan assets like the Rule, the SEC recently proposed the Regulation Best Interest (a.k.a. “RBI”) which would impose a higher standard of conduct for broker/dealers and their associated persons who give securities advice to “retail customers.” RBI is not a replacement of the Rule and is generally considered less stringent. With the DOL’s recently announced plan to re-propose its Fiduciary Advice Rule in 2019, there is more coming from the regulators that will likely affect how to advise retirement plans, their participants, and investors.

Other Legislative Matters

Several other bills could change various rules under the Internal Revenue Code and ERISA. Below are some highlights:

Retirement Enhancement and Security Act (“RESA”)

Probably the most far-reaching – and recipient of the most media attention – RESA would make it easier for small employers to participate in Multiple Employer Plans (MEPs). Other features of the bill would affect rules pertaining to auto-enrollment, nonelective contributions, plan loans, certain nondiscrimination rules, and process for selecting lifetime income providers, all of which are intended to encourage small businesses to offer retirement plans to their employees.

Retirement Lost and Found Act

This act also minimizes the administrative burdens on plan sponsors by easing the requirements on them to locate former employees with small, unclaimed distributions. Locating these so-called “missing participants” can be a tedious and costly process for small businesses and the Act would require the government to create an online resource to find these individuals.

In addition to the legislative matters above, other bills have been proposed that cover a variety of topics including increasing the amount that could be distributed to a former participant without consent, simplifying the complex rules related to offering annuities in qualified retirement plans, and changing the default option for delivering plan information to electronic delivery. Stay tuned in 2019 as we continue to monitor new rules that will impact advisors and their firms…and navigate them together.

ERISA Bond vs. Fiduciary Insurance

ERISA bond

By Allison Brecher, General Counsel, Vestwell

With so much attention lately on fiduciary duty, as well as the surge of fiduciary litigation this past year, plan sponsors would be wise to explore their insurance options. While the ERISA fidelity bond (also referred to as a “fidelity bond” or “ERISA bond”), is required for all plans, there are other options as well. By understanding the difference – and the scenarios in which different types of insurance are used – you can help ensure your plan sponsors are properly protected.

The fidelity bond, required by ERISA, protects the plan against losses due to theft and embezzlement. Here’s an easy example: if someone steals money from the 401(k) plan, the ERISA bond compensates the plan for the damages. However, this provides no protection to the plan sponsor because the plan, not the sponsor, is the named insured. Not to mention how limited the application of this bond might be, given the unlikely scenario.

Still, the bond is legally required for anyone who “handles plan assets” (whether a fiduciary or not), and not having one can delay your plan’s Form 5500 filing and potentially result in disqualification, penalties, and personal liability for fiduciaries. Investment managers must have one, but advisors are not required to be bonded unless they make financial decisions about the plan assets or property.

An ERISA bond is easy and relatively inexpensive to obtain; sponsors using Vestwell can apply for one directly from our platform. However, it’s worth noting that the bond must be in an amount of at least 10% of the plan’s assets, and, since it’s been a good year for investment performance, sponsors should make sure their bond amount has kept pace with the plan’s growth in assets.

Some sponsors mistakenly believe they are protected on all fronts by the ERISA fidelity bond, but further protection may be needed. Fiduciary insurance, unlike an ERISA bond, is not included in a typical errors and omissions or directors and officers policy. Fiduciary insurance, as the name suggests, protects the fiduciary from damages that result from a fiduciary breach. Read the fine print on the insurance before moving forward because a fiduciary policy can cover litigation costs, foreign plans that are subject to laws similar to ERISA, and the cost of correcting plan compliance errors resulting from a fiduciary breach. Although fiduciary insurance is technically “optional,” we don’t believe a sponsor should leave anything to chance in the current litigation climate.

Mostly, it’s important for plan sponsors to know the coverage that exists to protect them and their participants, understand the liability they’re taking on, and be comfortable with the decisions they’re making. They’ll be looking to you for help.

“A” Solution, But Not Quite “The” Solution

solutionBy Allison Brecher, General Counsel, Vestwell

As speculation mounts over President Trump’s planned appearance in Charlotte tomorrow, the expectation is that the Retirement Enhancement and Savings Act of 2018 (RESA) will soon be signed into law. While Vestwell believes strongly in the spirit of the bill and what it’s trying to accomplish – making good retirement plans affordable and accessible to companies of all sizes – the bill fails to solve many retirement plan challenges.

Small businesses haven’t historically embraced 401(k)’s out of concerns for fiduciary liability exposure, litigation, fees, and administrative burdens, amongst others. RESA turns to Multiple Employer Plans (MEPs) as a solution because MEPs allow small employers to pool together to share expenses. The belief is that small businesses will be more likely to offer retirement plans once they can offload some fiduciary responsibility and enjoy traditionally “large plan” costs.

Unfortunately, there are still some shortcomings in the bill that lead to missed opportunities and confusion. The main ones we’ve identified are around:

Fiduciary responsibility. While the bill states that fiduciary responsibility can be offloaded, some would argue that is already the case today with a 3(38) offering. It is unclear whether the new bill would offload liability of all responsibilities – such as the responsibility of the plan sponsor to select an un-conflicted provider – but doing so would require a re-write of ERISA laws rather than just a notation in a new provision. In addition, it is not clear who – if not the plan sponsor – is responsible for protecting the plan against conflicts of interest, prohibited transactions, and other such obligations.

Lead participant employer role. What exactly is the role of the lead participant employer? How do they get selected and evaluated? Are they compensated and, if so, how much and who decides? And how does insurance account for this unique role? Without a clear outline of the lead participant role, it is hard to envision the way companies decide to – and continue to – work together.

General retirement plan shortcomings. Unfortunately, a more “fair” cost doesn’t give plan sponsors a better understanding of what they’re getting with a retirement plan. In many cases, fees are buried, service offerings unclear, and administrative burdens cumbersome. The bill does not address any of these challenges.

The good news is, options exist to better support small plan sponsors even without RESA. The advent of tech-forward retirement platforms (like Vestwell) bring solutions to the issues of cost, fiduciary responsibility, administrative burden, and transparency. They also address many of the challenges of RESA. Because a modern-day retirement platform doesn’t require the pooling of resources, a plan sponsor can enjoy custom plan designs and pricing, tailored to its workforce, rather than having to compromise based off the collective needs of the MEP. And since technology automates many expensive processes, plan sponsors are afforded economies of scale comparable to (if not better than) what an MEP would bring. As a result, a company can benefit from the personalization, strong customer service, competitive pricing, fiduciary oversight, and transparency that all plan sponsors and participants deserve.

So, while it is our mission to support the healthy retirement of all Americans, we want to ensure they don’t just have access to a plan… but that they have access to the right one.

Maximize Savings with a Safe Harbor Plan…And Soon

safe harbor

Safe harbor 401(k) plans can be a win-win for employers who want to maximize tax savings and retain employees. There is still time to reap the benefits for 2019.

1. Safe harbor basics

A safe harbor is like a traditional 401(k), but the employer must contribute, and contributions become fully vested when made. Contributions can either be limited to employees who make deferrals or offered to all eligible employees.

2. The trade-off may be worth it

Unlike traditional 401(k) plans, safe harbor plans automatically pass a number of required tests in order to keep your plan tax qualified and avoid other penalties and costs. These plans can be a great choice for small businesses that may have trouble passing nondiscrimination testing. For example, a family-owned or small business with more highly compensated employees relative to “rank and file” or non-highly compensated employees may otherwise have difficulty passing compliance tests.

3. More good news

The business owner can contribute the maximum annual deferral amount to his/her own 401(k) plan ($18,500 plus any catch up contributions), receive additional savings from the company’s matching contributions (they’re an “employee” too) and, come tax time, the business can deduct all matching contributions (up to the $55,000 IRS limit).

4. There is still time to maximize the savings for 2019

Safe harbor plans must be in effect three months prior to the plan year-end date, which means eligible employees must be able to make salary deferrals starting no later than the payroll period that ends on or after October 1 of the plan’s first year.  This means plan sponsors must make decision and sign necessary documentation by September 1.

5. If you already have a plan, you can take advantage too!

If you offer a different plan, but would like to take advantage of Safe Harbor benefits, here are dates to know:

  • By or before November 30, 2019: Your provider can amend your plan or start a new plan with a safe harbor provision for the following year
  • December 1, 2019: Your employees receive a 30-day notice of plan revisions
  • January 1, 2020: Safe Harbor provision takes effect and exempts the plan from nondiscrimination testing

Overall, there are benefits to any type of retirement offering, but a safe harbor plan can be a smart decision for many companies, particularly for small business owners. If you have any questions about whether a safe harbor plan is right for you, reach out to info@vestwell.com at any time.

What to Consider When It Comes to 404(c) & QDIA Compliance

QDIA

In order to receive the benefits of ERISA §404(c), plan fiduciaries must comply with certain requirements. The following recommendations will help advisors and plan sponsors evaluate their efforts.

1. Fiduciaries should not “set it and forget it” when it comes to Target Date Funds (TDFs).

Fiduciaries should follow an objective process to evaluate TDFs, understand the TDFs’ investments and fees, and periodically review them. Key areas of focus and questions to consider include:

  • Review the fund lineup to ensure it includes a review of the funds included in the TDF and the individual managers that oversee the TDF. When considering a pre-packaged product offered by an investment firm that may also serve as the plan recordkeeper in bundled situations, examine whether the TDF comprises only proprietary funds of a single firm. Don’t fail to compare other available options without proprietary funds.
  • “To” versus “through” matters. Off-the-shelf TDFs are not customized to the specific circumstances and characteristics of particular plans. Decide whether the TDFs’ glidepath of “to retirement” or “through retirement” is appropriate. Consider, for example, participants’ contribution and withdrawal patterns, the average retirement age, and the existence of other benefit programs, all of which can affect the investment time horizon for the TDF.
  • Managing fees is important since they directly erode participants’ assets and they can vary significantly. Pre-packaged TDFs may include bundled fees including asset management fees for the various investment mandates. Bundled fees may be appropriate, but fiduciaries must understand the fee structure and components to accurately compare TDF products. If the expense ratios of the individual component funds are substantially less than the overall TDF, fiduciaries should ask what services and expenses make up the difference.
  • If the TDF is not pre-packaged, make sure the TDF provider understands the other benefit plans offered by the sponsor, including traditional defined benefit plans, salary levels, turnover rates, contribution rates and withdrawal patterns so that the sponsor and provider can together consider the impact of the TDF’s glidepath and asset allocations on the employee population.
2. Advisors can develop custom ETFs to help plans meet their fiduciary duties and control the risk exposures and fees for participants, but must be sure they are appropriate for the plan. Some questions to consider:
  • What asset classes does it include and how does the glide path progress?
  • Should the fund include alternative investments, and, if so, what would be the appropriate investment allocation.
  • What is the mix of active and passive management?
  • What are reasonable fee levels?
  • Do any pre-packaged TDFs satisfy the analysis?
  • What is the best way to implement the custom TDF?
3. If you’re considering ESG investments as part of a plan lineup, consider competing views.

Selecting an ESG-themed investment option without regard to possibly different or competing views of plan participants or the returns of comparable non-ESG options would raise questions about the fiduciary’s compliance with ERISA. For example, selecting as ESG target date fund as a QDIA would not be prudent if the fund would provide a lower expected rate of return than available non-ESG alternative target date funds with similar degrees of risk.

4. For plans that include TDFs with a lifetime annuity option, make sure the fund satisfies IRS requirements in order to avoid separate nondiscrimination tests.

Most of those options are only offered to older employees and they cannot include certain employer securities that are not readily tradeable on an established securities market, as well as other regulatory requirements.

5. Don’t blindly recycle last year’s QDIA notice.

If the plan provides default investment options for participants who fail to make affirmative selections, make sure participants receive a QDIA notice that complies with legal requirements. Participants must be provided with the notice 30 days in advance of the effective date and each year. They should also be given the prospectus, any material relating to voting, tender or similar rights provided to the plan, a fee disclosure statement, and information about the plan’s other investment alternatives. The investments comprising the QDIA should also be reviewed to make sure they satisfy DOL Reg § 2550.404c-5(e).

6. Check all documents thoroughly.

Plan fiduciaries should check the plan’s investment policy statement, investment management agreement, investment guidelines and related plan documentation to ensure that any investment option is permitted by the plan.

7. Make sure to document the evaluation of these and other appropriate considerations and keep it in a centralized file.

While you’re at it, calendar future review dates so that they don’t get overlooked. Some questions to ask:

  • Has the fund’s strategy or management team changed significantly?
  • Is the manager effectively carrying out the fund’s stated objective?
  • Has the plan’s objectives changed and should any funds in the lineup be changed?
  • Review the fund’s prospectus and offering statement. Do the fiduciaries understand the strategies and risks? Do any TDFs continue to invest in volatile assets even after the target date and, if so, do the fiduciaries understand and have they clearly communicated that to participants?
8. Revisit employee communications.

Employees should understand the investment options available to them and communications should be written with a style and content appropriate for the workforce. If they do not understand a TDF’s glidepath when they invest, for example, they may be surprised later if it turns out not to be a good fit for them. Consider surveying employees or a sample of them to make sure they understand.

Questions?

 

 

Allison Brecher
Vestwell
allison.brecher@vestwell.com

 

 

Carol Buckmann
Cohen & Buckmann
carol@cohenbuckmann.com

Lauri London
Cohen & Buckmann
lauri@cohenbuckmann.com

Advisors’ Checklist: Helping your retirement plan clients through M&A activity

M&A

2018 is shaping up to be a record setting year for mergers and acquisition activity with plenty of opportunities for advisors to help clients evaluate some key issues related to their retirement plans. Whether your client is entering into a corporate merger, acquisition, liquidation, consolidation, or spin-off, there can be significant impacts on the retirement plans involved, and you can help your client avoid problems that are often overlooked.  Flagging these issues for your clients now will help them avoid headaches and potential tax and other penalties later.

Here are some things consider:

1. Transaction Transaction structure

M&A transactions have a big impact on the parties’ retirement plans that can be easily overlooked. In an asset purchase, the buyer purchases assets of the target company and generally wants to limit or eliminate its liability for any issues associated with the seller’s plan. That can usually be accomplished by terminating the target company’s retirement plan and starting a new plan to avoid becoming a successor plan sponsor. In a stock sale, the buyer purchases assets and liabilities and the purchased company becomes a subsidiary of the buyer and part of its controlled group. In a merger, the buyer and seller form a surviving entity and any obligations owned or owed by either company are now owned and owed by the survivor.

2. Service provider contracts, collective bargaining agreements, and other important documents

The buyer should know that the target company has been operating its plan in compliance with legal and regulatory requirements and can learn that through a document review of the plan documents and all amendments, nondiscrimination test results, group annuity contracts, most recent determination letter (which will verify that the plan has been qualified, thereby avoiding the potential consequences of mixing non-qualified assets with qualified assets), and most recent SPD and SMM to verify what information has been communicated to participants and could become binding on the sponsor. One often overlooked area is the review of existing contracts with record keepers, custodians, and collective bargaining agreements to determine whether there are any advance notice requirements before terminating those relationships, any required contribution increases or termination fees, or any other restrictions.

3. Investment lineup

The plans involved in a transaction will rarely have the same investment options as the buying/merging company. Review the lineup carefully to evaluate any fees or other restrictions.

4. Protected benefits

Plans from different companies will also likely have different plan features. The plans’ provisions must be analyzed to ensure that the transaction does not violate the anti-cutback rule.

5. Controlled groups and coverage testing

A transaction may result in the seller becoming a subsidiary and part of the controlled group of the buyer. That means that the buyer’s compliance testing must include the subsidiary’s employees unless they are excludible. Employees of the purchased organization may need to be given meaningful benefits in order for the plan to satisfy compliance testing.

6. Service crediting rules

A new organization must consider whether – and to what extent – an employee’s service with the prior organization counts for eligibility and vesting in a new plan.

7. Transition relief

A plan may have a limited period of time before coverage testing is required if three conditions are met: the transaction causes a company to become or cease to be part of a controlled group, the plan passed coverage tests before the transaction, and if there weren’t any significant changes in the plan features or coverage of the plan. If those conditions are satisfied, then the plan will be deemed to meet coverage requirements until the end of the plan year after the year of the transaction. Plan amendments made after the transaction could end that transition relief period.

8. Same desk and successor sponsor rule

The seller’s plan might be unable to terminate if the new entity is a continuation of the old one. Where the employee performs the same work in the same location, even if there has been a formal change in the employer name, the same desk rule applies and the seller’s plan may have to retain the accounts and continue operating the plan. Additionally, the buyer may be unable to offer a new plan right away if it is considered to really be a successor to the seller.

9. Loans

If a plan is terminating, the participant’s retirement plan balance must be distributed with an offset taken for the amount of the outstanding loan amount. The participant needs to roll that distribution to an IRA or other qualified retirement plan in order to avoid penalties for an early withdrawal. The buyer may consider making alternative arrangements to ease the burden on participants with outstanding loans.

10. Missing participants

All plan assets must be distributed following a plan termination. Sponsors should build in additional time and resources to locate terminated participants whose addresses may have changed. The IRS recently issued guidance about how to deal with these missing participants.

11. Different plan types

Issues can arise when a transaction involves different plan types (eg: defined benefit plans, defined contribution plans, safe harbor and non-safe harbor plans), especially if one of them is a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan. By design, those plans require automatic enrollment of all eligible employees who have not made an affirmative election. If the surviving plan is a QACA plan, the sponsor must make sure all requirements are met in enrolling the acquired employee population.

12. Forfeiture accounts

The acquired plan may have a balance in a forfeiture account, which may need to be depleted before the transaction closes. The plan may also address what happens to funds remaining in the account, whether they become assets of the new plan, or can be used to offset plan expenses or other permissible purposes.

13. Excess contributions

Transactions may cause one of the plans to have a short plan year and the sponsor or participants of the acquired plan may have overfunded the plan. Buyers should be on the lookout for participants who are approaching the IRS annual contribution limits.

14. Participant communications

Communicating with participants plays a critical role in creating a smooth experience. In addition to distributing legally required notices, sponsors should send participant-friendly communications to educate participants about the plan and their overall benefits.

Going through M&A activity can be overwhelming enough. It’s important for your clients to have a trusted source who can walk them through the implications for their retirement plans, and proactively addressing these potential pitfalls can go a long way.

 

401(k) Aggregators – What You Need to Know

aggregators

Today’s advisors must meet the ever-changing demands of regulations and technology, while facing growing competition from traditional firms and start-ups.

But in recent years, a new breed of 401(k) “aggregators” have emerged in the retirement space, attracting 401(k) plan advisors to partner up, refer, or sell their entire book of business.

Known for their expertise, aggregators primarily offer economies of scale to small-to medium-sized registered investment advisor (RIA) firms. However, if you’ve been curious about, or considered working with such entities, consider the the pros and cons of doing so.

What is a 401(k) Aggregator?

Aggregator firms work one of two ways: They either purchase RIA firms outright, or offer an affiliation model where they compensate firms with referral fees or equity in the holding company. Acquisition typically occurs for firms with more than $1 million in revenues, while those with less than $1 million tend to become affiliates.

Partnership has its Perks

For solo advisors and small- to medium-sized firms, there are benefits  to working with aggregators:

Credibility

You may enjoy the credibility and brand recognition that come with partnering with a larger or well-known entity.

Resources

As aggregator firms grow and gather assets, they may offer expertise that small RIA firms perhaps couldn’t access or afford to develop in-house. For example, most aggregators offer support in the form of lead generation, practice management, technology, client onboarding, marketing, and other areas that are perhaps beyond the scope of a small advisory firm’s capabilities.

Competitive Edge

Aggregators may allow advisors to offer more competitive pricing and a greater menu of plan funds to prospective plan sponsor clients. These advantages are often due to not only an aggregator’s larger asset base, but also from distribution deals they are often able to negotiate with asset managers. Additionally, you may be able to expand your product and service offerings.

Before You Hand Over the Reins

Before joining forces with an aggregator, consider that your firm’s smaller size may actually be to your benefit. After all, partnering with an aggregator means that you will likely be held to their rules and approach to 401(k) plan management. It’s important to assess your firm’s  strengths and weaknesses,. If you go the aggregator route, make sure the sum is greater than its parts for you and your partners.  

Structure

If part of your motivation for becoming an RIA was entrepreneurial drive and the freedom to manage your clientele and plans your way, this may not work well within the bounds of the aggregator’s rules and procedures. However, this isn’t to say that your talents and drive won’t fit with an aggregator environment; some aggregators want RIAs who will continue to diligently oversee and build their book.

Identity

Consider your branding and investment philosophies and whether you’re willing to compromise, especially if you will soon be identified as being part of, or belonging to, the aggregator firm.

Also, understand that by allowing aggregators to control your book, you are contributing to the “institutionalization” of the industry, where a home office takes the lead role in determining what investments 401(k) advisors can use.

Technology

Firms may be able to address many of the reasons to sell or partner up with aggregators by embracing a robust 401(k) technology plan management platform.  Today, 401(k) platforms exist that enable firms to scale more adeptly when it comes to everything from lead management to 401(k) plan management.

If you decide to go the aggregator route, do your homework. As in any business arrangement, consider the best route: selling your firm outright, accepting an affiliate arrangement, or continue growing the business that you’ve already built.