Brooke’s Note: There’s already something of a fever in the RIA business over the prospect of prying most of the high-net-worth retail assets away from commission-based advisors in the next decade. Wirehouses alone still have about $4.4 trillion of these assets. Meanwhile, there’s more of dawning realization by RIAs that they are also empowered to – individually and collectively – win a significant share of the retirement assets in this country – another cool $4.5 trillion or so just from defined contribution plans [never mind IRAs]. This article shows that RIAs have already made significant headway in that department.

Among mega 401(k) plans that use an outside advisor, nearly half are working with an RIA, according to a new Cogent Research study that also suggests that RIAs are poised to win more of the defined contribution market.

Of the plan sponsors with plans that have more than $500 million of assets, among who choose to use a financial advisor to oversee the investments in their company’s 401(k) plan, 49% of them use an RIA, according to Retirement PlanscapeTM 2010. The report is based on a survey of 2,193 401(k) sponsors in the United States. This compares to just 25% who say they use a regional broker, 14% who use a bank broker, 7% who use a wirehouse broker and 5% who use an insurance-related broker. [see chart below].

The larger plans going to RIAs is consistent with the experience of Ryan Alfred, president and co-founder of La Jolla, Calif.-based Brightscope. His company tracks the performance and fees of 401(k) plans.

“As for the statistic — 49% RIA /7% wirehouse — that is also not very surprising,” he says. “Larger plans are demanding their advisors take fiduciary responsibility and are demanding more disclosure. RIAs and consulting firms are better able to do this than many wirehouse broker-dealers. But keep in mind that many of those RIAs might be dually registered as broker/dealer reps. Its really not as easy as saying RIA versus wirehouse anymore, especially as many of the wirehouses set up RIAs to enable their top advisors to serve a plan in that capacity.”

Scott Pritchard managing director of Capital Directions LLC of Atlanta also wonder just how RIAs and brokers are parsed in the study . Capital Directions has $800 million of assets under management including $200 million of 401(k) assets.

“The claim that 49% of plans over $500 million are advised by RIAs is quite surprising,” he says. “Very few RIAs have anywhere near $500 million in assets under management in their entire firm, much less in one plan to which they serve as an advisor.”

RIAs manage bigger pools of 401(k) assets

Outliers aside, a survey of 363 advisors that Cogent completed in April 2009 showed that RIAs tend to manages bigger pools of 401(k) assets.

It showed that while fewer RIAs manage retirement plans — only 41% compared with 55% of all advisors including stock brokers — the plan sizes the RIAs manage are generally larger.

The average plan assets for RIAs who sell/manage 401(k) [and other defined contribution] plans is $32 million compared to $13 million for the average advisor selling retirement plans. Many RIAs do not sell retirement plans because those sales are compensated by commission and they do not have a brokerage license.

Across all kinds of plans, wirehouses are still king with 34% of plans being overseen by their brokers compared to 30% for regional brokers, 9% for banks, 16% for RIAs and 11% for insurance company-affiliated brokers.[see chart below]

Scratched the surface

Indeed, RIAs may only have scratched the surface of the 401(k) market considering that only 40% of plan sponsors of all sizes even use an advisor, according to Carrie Merrick, author of the study and senior project director for Cambridge, Mass.-based Cogent. Rather than having an advisor, plan sponsors often take what guidance they can from third-party administrators and retirement plan consultants, she adds.

“Absolutely [RIAs are likely to gain more ground] because only two out of five plan sponsors use an advisor not affiliated with their plan provider,” she says.

RIAs are considered to have an edge in winning 401(k) assets in many instances going forward. They are skilled fiduciaries and Department of Labor rules going forward will make the conflicts inherent in being a stockbroker more of a hurdle to managing retirement plan assets. See: RIAs are starting to create their own 401(k) companies as alternatives to John Hancock and The Principal

Cogent Research chart from Retirement Planscape
report shows what type of financial
advisor plan sponsors use to oversee
assets

Still, the study’s findings are indicative of the strides that RIAs are making in the 401(k) business, says Craig Watanabe principal with Penniall & Associates, Inc., an RIA in Pasadena, Calif. with approximately $600 million in 401k assets under management and $400 million in non-retirement assets. Its largest plan is $65 million but the bulk of its accounts are $5 million to $25 million in size.

“I believe there will be a fast growing sub-segment of RIAs who specialize in servicing 401k plans, and they will dominate this very lucrative market,” he says.

Fidelity and Vanguard lead different niches

The Cogent study also concludes the market has different leaders in different segments for the big companies, such as Fidelity Investments and Vanguard Group that provide retirement plans.

Much of the Cogent study focused on the challenges that plan providers face in satisfying their plan participants depending on how big or small their companies are.

Among micro-plans – ones with less than $5 million in plan assets – the area of administrative support is the most critical driver of sponsor loyalty. For plans with between $5 million and $20 million, a broader set of needs and concerns come into play, including plan participation support, fees, and administrative support.

Finally, among larger plans – those with more than $20 million in asset – the ability of retirement plan providers to help sponsors with participant communications and problem solving has a critical impact on loyalty.

“These findings reflect the day-to-day realities that sponsors face across the full spectrum of plan sizes,” said John Meunier, Cogent Principal, in a release. “At the most basic level, micro-plan sponsors need help getting their plans up and running. As plan assets grow, so too do sponsor needs, not only to manage the plan but participants and costs as well. And when we’re talking about the biggest plans, it’s more about accountability to stakeholders, and keeping the plan and participants on track.”

The factors weighed by plan sponsors may shift as more cost information becomes available about them, Alfred says.

“I think in a non-transparent market when fees/services cannot be compared of course you are going to have plan sponsors focused on just services,” he says. “I think the big evolution the market is going to have to go through is fee information is going to come available that will allow sponsors to actually quantify the value they are receiving for what they are paying and determine if it is reasonable. This transition will be tough for many providers.” See: How Brightscope is using technology to create order in a messy 401(k) market

This spectrum of concerns correlated with plan sizes is likely to change as the 401(k) market continues to morph under more demanding regulations.

Written service agreement factor

“An important provision of the regulation would require written service agreements that define roles and responsibilities as well as specifying exactly what services are being provided for what cost,” Watanabe says. “Most plan advisers in the mid and large markets already provide written service agreements so what we will likely see is more uniformity in the level of services provided across the full spectrum of 401k plan sponsors.

“The Cogent Research found that among seven important drivers of loyalty, operational assistance was the most important in the micro market. I expect this will change and in future surveys the drivers of loyalty will converge with micro plan services and expectations aligning more with small market plans. This will place a lot of pressure on brokers and advisers who are not retirement plan specialists. Adequately servicing 401k plans is a demanding endeavor and we will likely see retirement plan specialists gaining market share.”

Among 10 leading providers serving the micro-plan market, Bank of America/Merrill Lynch achieves the highest loyalty rating with sponsors it currently serves, followed by ING and Mass Mutual.

Among 11 leading providers serving small plans ($5-$20 million), Fidelity Investments achieves the highest loyalty rating, followed by Principal Financial Group and Mass Mutual. Finally, among 10 of the biggest providers serving plans with more than $20 million in plan assets, Vanguard earns the highest loyalty ratings from sponsors it serves, followed by Charles Schwab and Fidelity.

The leadership of these firms in these rankings does not show much, according to Pritchard whose small company competes with these larger players to provide 401(k) plans.

Statistically dominant

“While the names are in different order in each category, the 10 to 11 names are all the same,” he says. “Obviously, those are the largest players in the 401(k) market and they are going to statistically dominate the rankings by the sheer number of plans they service.”

Changing these rankings will still take time to play out, Merrick says. Only 6% of the plan sponsors surveyed are considering switching providers because of it’s such an enormous task to make the move.