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In Practice June 6, 2024
Managing Assets Within the Plan
This PLANADVISER In-Depth story considers the new ways financial advisers are seeking to manage participant 401(k) accounts before they’ve rolled out.
Reported by Alex Ortolani
Art by Kiki Ljung
Fraj Lazreg was giving clients financial advice before 401(k)s existed. Now, he’s spreading the gospel to peers about the pressing need to manage the often large sums of money clients hold in their defined contribution plans.
“Things changed drastically over the decades, which comes with complications,” says Lazreg, who is regional director and portfolio manager with Money Concepts. “When 401(k) plans proliferated and became the vehicle for retirement … we saw the writing on the wall as to what needed to be done.”
Part of that activity was helping clients maximize their 401(k) investments alongside other assets. But Lazreg and other registered investment advisers note that advice about 401(k) plans has often been given in an ad hoc, back of the envelope fashion—sometimes requiring the client to execute the transactions.
“It was not done in a systematic way where the client can get the maximum benefit out of their plan,” Lazreg says.
Meanwhile, DC assets keep rising, and some data points to participants staying in plan longer. Managed accounts are one way for participants to get in-plan management and advice. But for those paying for financial advisers, DC plan services are—perhaps paradoxically—lacking, says Dave Goldman, Pontera’s chief business officer.
“When you get into the 401(k) space what you realize is that there are solutions for everybody in the plan except for the top 30%, or the people that have financial advisers, because you have target date funds and you have managed accounts,” he says. “But when you get to people who already have financial advisers, they are the ones struggling to get the holistic advice—so it’s upside down from that perspective.”
Today, firms, such Pontera and Future Capital, are offering the connection to 401(k) plan management. There’s also the more time-tested option of advisers working through a self-directed brokerage account, but only about 20% of plans offer that option, according to the 2024 PLANSPONSOR DC Benchmarking Report.
After looking at options, Lazreg went with Future Capital, he says, in part because the firm was offering to manage the assets within the plan, not to take them over.
“It benefits the client, but also, in the long run, it benefits the adviser because at some point in time, that client will stay with you if the service is good,” he says. “You’re looking at the 401(k) not as an investment vehicle by itself but a total compensation plan for the client that includes everything else … at some point in time that becomes assets under our management for rollover purposes.”
Fiduciary Implications
Lazreg notes that he is aware of and supports the new fiduciary rules by which managing a rollover can only happen under the Employee Retirement Income Security Act. In the meantime, Future Capital provides the fiduciary overlay for in-plan management.
Jay Jumper, the CEO of Future Capital, touts its RIA services. Many advisers, he says, aren’t equipped to manage clients’ 401(k) assets not only due to time and technology restraints, but risk from running afoul of fiduciary obligations.
“We’re a fiduciary,” Jumper says. “We’re coming on and engaging with the customer, taking on the fiduciary liability and managing the portfolio …. most broker/dealers are not wanting their advisers to have full discretion over customer assets, especially when they can’t surveil them because they are at Fidelity, Empower, Voya or wherever they may be.”
Jumper points to the vast and what he sees as growing market of DC savings that currently aren’t being served by advisers.
“Of households with between $100 million to $2 million of liquid net worth, 56% of their assets are in retirement accounts,” he says. “That means 56% of their assets are unreachable by the adviser.”
Historically, Jumper says, the only way advisers had to reach these assets was through managed accounts or the recordkeepers. The shift in the market, he notes, is that now many of those recordkeepers are going after the same pool of clients—and in many ways, they’ve got the better positioning.
“It’s kind of the Trojan horse,” he says. “A lot of people are going out and building out wealth assets, and they are creating whole divisions …. They are going out to advisers and saying, ‘I’ve already got your book of business. I’ve already got your customers.’”
Partner Up
Future Capital isn’t only working through wealth managers. The firm also works with retirement plan advisers as an offering direct to participants via the plan.
“We work with retirement plan advisers who are out selling plans to work with them to engage all the participants to get them on a customized plan to meet their retirement goal,” Jumper says. “For every dollar in a plan there is typically $3 to $5 of outside assets. What we help do is go engage with participants to identify those outside assets.”
Pontera, one of the most visible players in the space, provides financial advisers with the technology by which to monitor and allocate 401(k) investments. With its model, RIAs can be trained to use the service and then leverage it as an additional offering to clients.
The market interest has been clear from the results: Pontera has penned 32 partnerships since 2022, including firms with large footprints in the retirement plan and wealth world, such as CAPTRUST, Commonwealth Financial Network and SageView Financial Advisers. These are just the deals the firm has announced publicly, says Pontera’s Goldman.
“There’s about 85 million workers and $7.2 trillion of 401(k) assets,” he says. “It’s clear to our partners and to a lot of participants that these assets, although they are a significant portion of retirement savers’ nest eggs, are not getting enough attention—and the advisory firms and the participants are both seeing the same thing.”
Goldman says advisers have been providing 401(k) management for many years, but in his opinion, it’s a “cumbersome process” with layers of complexity and cost. Pontera, he says, is “not a new service, but just a more secure framework.”
Pontera charges an asset-based fee to the advisory firms using its services. Firms, like SageView, which signed on with Pontera in 2022, have been putting it to use in the field.
Adviser Use
“Previously, allocation advice was based on a static set of data that the client provided via statements or screenshots,” says Nick Lamb, senior financial adviser at SageView. “Now, we can view and manage our clients’ held away accounts in real time. In addition, the client gets the benefit of having investible assets professionally managed.”
Lamb says the ability to offer 401(k) and 403(b) is not just good for current clients, but prospecting.
“We are finding that some clients prefer a firm that can handle all their investments, including held away accounts,” he says.
Commonwealth is currently training some of its advisers on using the Pontera platform and will start rolling out services this summer, says Karen McColl, senior vice president, wealth management.
“We were having a lot of conversations with advisers that felt like they weren’t getting the full financial picture from their clients,” she says. “For a lot of folks their great source of wealth is in their current retirement plan; we wanted to make sure there would be this systematic way to see what was in those accounts and help incorporate them into the full financial plan.”
McColl notes that, when talking to Pontera, they were drawn to data showing that an individual who gets professional management of their DC investments outperforms those without management by an average of 4% after fees.
“The missing part for us is allowing the adviser to set the asset allocation and do disciplined rebalancing, see inside the plan lineup, decide what the plan lineup will be, establish exposures, establish rebalancing schedules,” she says. “The adviser can be a lot more strategic around those different pockets of assets but still have the overarching approach to view everything together.”
