How advisors can position themselves for the coming 401(k) boom

Editor’s Note: On Oct. 14, the U.S. Department of Labor released final regulations concerning the disclosures that must be made to every plan participant in participant-directed individual account retirement plans such as 401(k)s. The new regulation was designed to set off a chain reaction that eventually – it’s hoped – leads to lower fees for people saving money for retirement. Getting ahead of that reaction intelligently could pay dividends for financial advisors.

“The demand for lower fees by 72 million participants and their families and 483,000 employers can awaken a sleeping giant that places similar demand on virtually every investment and financial product,” says Lou Harvey, the president of Boston-based DALBAR Inc., in a report he recently issued about the effect of the regulation on the industry. DALBAR audits financial service firms, including investment advisers. The report is called ERISA 404(a)(5) A Game Changer?

As the dominoes fall, advisors have the opportunity to play two key roles: They can help plan sponsors prepare for the coming crisis as employees, through the new disclosure, see the fees they pay for their plans. Advisors can also help plan administrators explore lower-cost options, either before the disclosures go out in November or afterwards.

In these excerpts from the report, Harvey outlines the steps advisors can take to get ahead of these regulations that he says will hit the industry like a slow-moving tsunami.

As background, the regulation, which it’s estimated will cost the industry $16.9 billion in lost revenues and added expenses, requires plan fiduciaries to give workers:

• Quarterly statements of plan fees and expenses deducted from accounts.
• Cost and other information about investments available under their plan.
• Access to supplemental investment information.

EXCERPTS

How advisors can step into the educator role

More than at other times, the new regulations require an informed customer base. Providers who prepare plan sponsors and participants properly are most likely to prevail in the crisis. There are six steps to preparing plan sponsors and participants for the disclosures:

1. Understand what is currently provided and why. This is done by preparing a simple and clear summary of all the services being provided in language familiar to the average plan sponsor. Reviewing this summary reinforces what services the plan sponsor is receiving.

2. Learn what lower cost alternatives are available without changing vendors. Concurrent with the review of services being offered, the plan sponsor is invited to consider other options that may be higher or lower in cost. This enables the plan sponsor to put current service in perspective.

3. Get participant buy-in by involving them in the decision of what to keep and what to let go. A simple low cost survey can be used to get this involvement and is reinforced if the results are shared with participants and any necessary action taken.

4. Inform participants of notices ahead of time. Participants should have expectations set about receiving new disclosures in standalone notices and/or in conjunction with their periodic statements.

5. Explain to participants what decisions they should make with disclosures. The first time a new disclosure is sent, each participant should also receive a decision guide for what to do about what they have learned. This will help the participant to decide if action is warranted.

6. Prepare to answer participants’ complaints. Options include a hot line to call with concerns, staff specifically trained on these matters, a Website option to answer frequently asked questions and post additional questions.

How advisors can think about restructuring options

There are four approaches to restructuring the plan business:

1) Reduce costs
2) Offer different pricing options
3) Limit the variety of plans and
4) Establish minimums.

The most difficult approach by far is to reduce cost of what is being offered today. This will only apply to providers where there are identifiable efficiencies that can be realized without negative effects elsewhere. Examples are consolidating business units, changing vendors and renegotiating contracts/leases.

Less difficult is changing the pricing structure. A single bundled price can be broken down into its components that are priced as optional items. The plan sponsor, with input from participants, can make the conscious decision to retain or reject each option as long as the offer of the option occurs before the disclosure crisis.

Where unbundled pricing already exists, it is prudent to re-examine the existing prices to ensure that there are sufficient discrete options and that each is priced appropriately.

Graceful exit

The third restructuring approach is to limit the variety of plans. This means serving only those plans with which pricing can be competitive at the expense of the revenue loss from plans that are less profitable. This approach need not be taken in advance of a crisis because it will occur naturally; plans that are priced above the market rates or receiving service levels that are below par with ultimately seek other providers. The only question here is how graceful the exit will be.

The fourth approach of establishing minimums is a way to force less profitable plans to leave, so efficiencies are gained among the remaining profitable plans. This approach will lower revenues with the expectation that profit margins will increase to permit fee reductions when there is pressure to do so.

The full report is available at www.dalbar.com.