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The 401(k) Gameplan

Businesses large and small have found 401(k) retirement plans to be an important benefit to attract and retain a superior workforce. But small-business owners often despite their good intentions rarely find the time or resources to select and administer 401(k) plans. That spells opportunity for financial advisors who are willing to learn the intricacies of the retirement plan market. The good news:

Businesses large and small have found 401(k) retirement plans to be an important benefit to attract and retain a superior workforce. But small-business owners — often despite their good intentions — rarely find the time or resources to select and administer 401(k) plans. That spells opportunity for financial advisors who are willing to learn the intricacies of the retirement plan market.

The good news: It's getting easier. With vendors targeting small businesses for growth, reps and financial advisors are able to choose from an array of products and services that simplify the process of selling and servicing 401(k) accounts. There are new funds designed to simplify investing for plan participants, new accounts aimed at sole proprietorships and more marketing services, including training to help business owners learn their fiduciary roles and tools for assisting participants in choosing investing strategies. “It's a great time for advisors to be in this business,” says Jim Davey, managing director of corporate retirement plans at The Hartford. “Registered reps are playing an increasingly important role as a resource.”

For one thing, the pie keeps getting bigger. Cerulli Associates, a Boston-based financial industry researcher, projects that 401(k) assets will reach $2.5 trillion by 2008, an increase of $700 billion from 2003 levels. Plus, “the small-plan segment is growing faster than any other segment,” Davey says. “The small employer needs the most assistance managing the overall plan, and it's where you can have the most impact as a financial professional. This is particularly important now as the retirement plans market is evolving quickly.” President Bush has proposed several new savings vehicles, including Lifetime Savings Accounts and Employer Retirement Savings Accounts, in addition to changes in the Social Security program.

“Becoming comfortable with the intricacies of the 401(k) is critical to long-term success,” says James Gilbert, president of EasyTec Systems in Los Angeles, which develops plan administration software. Gilbert first learned about 401(k) plans as a Merrill Lynch broker when they were introduced in the 1980s. He says it took him several weeks of reading 401(k) manuals on the weekends to understand how the plans worked. Even now, when plan vendors provide plenty of support for advisors, “what it takes to be successful in the 401(k) can't be learned in an hour or two,” says Gilbert.

The payoff goes beyond the commissions on setting up a plan, which are typically based on the plan size or the product sold. One large plan provider pays a commission of 50 to 150 basis points for setting up a plan. Future years might pay an ongoing 25 to 50 basis points. “Setting up the 401(k) gets you inside the walls of the business, and you're endorsed by the employer in a way,” says Gilbert. An advisor who makes a good impression when signing up employees for the 401(k) plan can hope to turn some of those folks into clients. “It's like extending your own family — as long as you do a good job,” says Gilbert.

Reps remain constrained in how much investing advice they can give to 401(k) clients, but vendors are making choices easier for the employees. Fidelity, Principal, the Hartford and other large plan providers offer automatic enrollment plans intended to increase participation and are also promoting plans that allow participants to sign up for automatic annual contribution increases. Another way to make investing choices easier for plan participants is by offering life cycle funds, which automatically adjust allocations among growth and value equities and equities and fixed-income investments according to the client's age and risk profile.

“Life cycle funds are an exact complement to retirement programs because they offer dynamic asset allocations,” says David Liebrock, executive vice president of the Large Plan Services Group for Fidelity Employer Services Company. The Boston fund giant's Advisor Freedom Funds are offered in five-year increments, beginning with Fidelity Freedom Fund 2005, for those about to retire, through Freedom Fund 2040, for workers with a long way to go. The asset mixes are automatically adjusted, becoming more conservative as they get closer to the retirement target date. Other fund companies have similar offerings.

“The nice thing about lifestyle funds is that plan participants can't make a really bad decision,” says Hal Schweiger, a fee-only planner with Capital Asset Advisors in San Diego. Schweiger, who advises plans ranging from professional groups with 30 to 50 participants to companies with up to 300, builds his plans around funds from Dimensional Fund Advisors in Los Angeles.

Other providers are pushing managed account options for 401(k) participants. AssetMark Investment Services of Pleasant Hills, Calif., with $3 billion under management, rolled out a fully bundled 401(k) that includes six proprietary managed accounts in September 2004. Plan sponsors can select up to 14 additional funds from a range of providers in addition to the managed accounts. Marketing manager Ken Bakar describes the managed accounts as “target allocation” funds that are either conservative, balanced or growth oriented.

“We think managed accounts in 2006 will be as popular as self-directed accounts were in 1999,” says AssetMark CEO Ron Cordes. The firm had seven plans in the process of converting to its program by January, with an additional 20 in the pipeline, Bakar says. AssetMark works with fee-based advisors whose compensation is built into the plans they structure. Like other plan providers, AssetMark supports advisors with tools and marketing material that helps them support plan participants and the sponsors.

The Principal Financial Group plans to offer its own managed account program later this year in association with Ibbotson Associates. Participants opting for the plan will get phone and Internet access to a licensed counselor. The option will be included in Principal's basic retirement package at no additional cost to the business owner. Participants will pay an asset-based fee. Principal sells its plans primarily through a network of 15,000 commissioned brokers.

Another new product is the individual 401(k), which is aimed at self-employed workers like artists, writers and one-person consulting firms. According to Kevin Morris, strategic marketing consultant at Principal, individual 401(k) participants can contribute up to $42,000 in pretax money into their plans in 2005. Like a regular 401(k), that figure increases annually. The plans first became available in 2004. “We started to see pretty dramatic sales in the fourth quarter,” says Morris.

Another option for small-business clients may arrive in 2006 in the form of a Roth 401(k), which was created as part of the 2001 tax-cut legislation. The bill stipulated that next year would the first time the new savings plan could be offered. Like Roth IRAs, these accounts will allow workers to invest after-tax money and those contributions, plus any investment gains derived from them, will be tax-free when withdrawn in retirement, says Jim Farrell, senior financial advisor in the Wealth Management & Trust Group of Univest, a regional bank in Souderton, Pa.

And, even as major corporations are trying to wriggle out from under defined-benefit plan obligations, such programs are still an option for many small-business owners. A defined-benefit plan does not have to be offered to all employees, says Gerard Breitner of Excomp Asset Management in Garden City, N.Y. The rules are complex, but an employer could exclude certain job classifications, for example, though not an individual by name. Unionized employees' participation in defined-benefits plans is subject to collective bargaining. “Defined-benefit plans work best where there is an owner-principal whose employees are younger and not highly paid,” Breitner says. For business owners and principals in their late 40s or early 50s, who are now making a decent buck, the defined-benefit plan is sometimes the right choice.

Defined-benefit plans do not have the same contribution limits that 401(k)s have — currently $14,000 pretax per year. The owner must decide the annual payment he wants to receive from the plan at retirement; for the 2005 tax year the maximum is $170,000. The owner could also opt for a lower number. A pension actuary must be engaged to determine the annual contribution necessary to accumulate the reserve needed to generate the retirement payout, Breitner says, adding the benefit for the business owner is that the contribution comes off the bottom line and reduces the owner's current taxable income. This strategy even works for sole proprietorships.

“It's the owner's private tax-free account that's free from creditors,” Breitner says. Offering defined-benefit plans suits this fee-based advisor, who says he's “like a shoe salesman. I custom fit a plan to the needs of the owner and it creates value for the client.” But the owner needs to be comfortable that the business will generate the cash flow to fund a defined-benefit plan on an ongoing basis.

Advisors who sell retirement plans are also investing in their own futures. Not only do they cement relations with their small-business clients, they position themselves to recruit clients from among the plan participants. And even if they don't sign up now, in the future they will be retirees — and might be looking for solid advice on how to manage that retirement nest egg.


401(k) assets will reach $2.5 trillion by 2008 (up $700 billion from 2003), and the small-plan segment is growing faster than any other. This translates into an increasing pool of potential clients for financial advisors.

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