In Practice October 13, 2014

‘How I Boosted My Plan Practice’

What are some secrets to a thriving retirement plan business? Advisers share tips to increase this part of their book of business.
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Stay Ahead of the Curve

Seven years ago, just before fee disclosure was starting to gain traction, Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries (ASPPA), met with Rick Canipe, the principal and founder of MillenniuM Investment and Retirement Advisors, to discuss the implications of the upcoming fee disclosure regulations.

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MillenniuM sat down to take a long, hard look at the Employee Retirement Income Security Act (ERISA), recalls James Holland, the firm’s director of business development, and realized that compliance was the No. 1 issue they needed to get a grip on. “ERISA is complex,” Holland says. “We realized compliance could get folks into trouble, because a retirement plan has many moving parts.”

Noting that ERISA is a massively complex piece of legislation, Holland points out that the majority of the bill focuses on the compliance aspects of running a plan, not on the investments people choose. At the time, he says, much more attention was being paid to investment choices. “But the world is round,” he says. “Just because something happened a certain way for years, doesn’t mean it has to continue that way.”

Build Your Team

The answer? Assemble a skilled team. Holland says ERISA attorneys, an Internal Revenue Service (IRS) enrolled agent, compliance team, an auditor, and a certified public accountant (CPA) are some of the key players in effective client service. The team makes is easy to run a compliant plan, he says. Without the team, it’s very difficult to make it work.

First find your partners, Holland advises, and simply dipping your toe in the water is a waste of time. “Jump in the deep end and surround yourself with partners ready to help you,” he says. If you contact three leads and it doesn’t work out, you can’t throw up your hands and say it was a waste of time.

The time factor and level of commitment are critical. A few hours a week is insufficient. Holland recommends devoting a sizable amount of time—perhaps 25% of one’s work week—to the development of the retirement plan practice.

These moves have resulted in solid, organic growth through client acquisition for MillenniuM over the past five years, which Holland estimates conservatively at 35% a year. “It’s only going to get faster as people understand this space,” he says. The firm operates under a flat-fee model only.

Use Digital and Social Media Tools  

You can’t simply reject digital and social media tools with a blanket “they won’t make compliance requirements,” says Chuck Hammond, co-founder of the 401(k) Study Group in Hanover, Pennsylvania. First it was email that worried providers—then the Securities and Exchange Commission (SEC) said it was OK to use email. Everyone was afraid to use Twitter, and then the SEC said it was OK to use Twitter.

Hammond points out that social media is highly scalable. “I reach almost 50,000 advisers alone on LinkedIn,” he says. “I can’t make 50,000 calls at the push of a button.”

While some advisers seem cautious about using what they don’t understand and can be quick to reject tools on the basis of assuming their clients are not using sites beyond Twitter or LinkedIn, Hammond is adamant about the need to stay current. “Don’t be afraid of the new, and don’t be a snob,” he says. More women tend to use Pinterest and more 17-year-olds use Snapchat, but that’s no reason to avoid these sites and tools, Hammond says. They might not be right for you, but you may be going out there with one less tool in your toolbox. “You should know how other people find experts,” says Hammond, an avid user of LinkedIn, Pinterest, Snapchat and the recently unveiled Postwire.

Hammond uses Postwire.com to build pages of personalized content for the firm’s sponsors and partners. The Postwire site describes itself as an attraction and retention tool to engage prospects beyond email, calls and meetings. The lowest tier of service is $35 a month.

Hammond recommends using sites to actively contribute in the retirement plan space for both advisers and plan sponsors. He finds relevant, meaningful information that allows advisers in turn to share relevant content. “Put it all in one spot, and use it to develop yourself,” he says.

“When people are trying to see if you know what’s going on, the one thing they’re going to want to go is your blog, your site, your LinkedIn profile,” Hammond points out. “Twenty-six percent of individual investors will go to your own online presence because they like the anonymity before they ever meet you.”

Which sites an adviser picks is less important than actually creating a unique Web presence, Hammond feels. “You need to pick one and use it to build a grocery store of your expertise: what’s important, growing, trending, and what’s coming down the pike,” he says.

His firm generally takes two new plans a year.

Make the Commitment

Advisers have to commit themselves to this part of the business—working with an individual or a business is very different from supporting a 401(k) plan, says Adam Nugent, president of Foresight Wealth Management in Sandy, Utah. “You can’t do it alone,” he says. “You have to have a great platform and a great operations team in order to scale this part of the business.”

At Foresight, Nugent explains they developed policies and procedures to service this part of their book of business, and established a specific 401(k) division, which allowed Foresight Wealth Management to price plans at much lower rate than the norm, while remaining profitable.

“We expanded our customer services and contact with our clients,” Nugent says, building custom Web pages for clients to be able to access their retirement accounts. Designations have been helpful, and Nugent says that working with several benefits providers lets them complement one another. “One focuses on the health insurance, and the other on the 401(k),” he says, “and we get referrals from other professionals.”

In the last 24 months, Nugent says the firm has more than doubled the number of corporate retirement accounts.

In Practice October 13, 2014

Reverse Mortgages Can Provide Critical Retirement Income

Many people use home equity as a source of retirement income because they simply do not have enough in savings, according to the Center for Retirement Research.
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Steve Sass, program director at the Center for Retirement Research at Boston College, tells PLANADVISER that a reverse mortgage “could be right if you plan to stay in the house your entire life. It’s not great if you are going to move. Of course, you don’t know if you’re going to move, so there’s risk, but there’s risk in everything.”

An individual must be at least 62 years old to receive a home equity conversion mortgage (HECM) loan, Sass explains, and essentially all reverse mortgages today are structured as HECM loans. Because the money received from the HECM is received as a loan, it is tax-free. The money borrowed, plus interest, reduces the home equity owned by the participant over time, and he or she can stay in the house without making any loan payments. In a case where the participant does move, sells the house, or dies, only what was borrowed by that point in time needs to be repaid. The participant will never owe more than what the house is worth, according to Sass.

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There are different ways to use a reverse mortgage, Sass says:

  • A line of credit, which can be used to pay for rising or unexpected expenses, or used as a source of income;
  • A lump sum, which can be used to pay off a mortgage or to modify a home;
  • Fixed payments either for life or for a set period of time. These payments can be used as income that cannot be outlived; however the payments do not increase with inflation. They can also be useful when delaying Social Security claims to increase monthly Social Security benefits.

With both perks and caveats, are reverse mortgages a good idea for generating income in retirement? “A reverse mortgage makes sense for someone looking to leverage home equity for income in retirement,” Sass explains. “Your home is typically your largest expense and asset,” he adds. “So if you need more income, a reverse mortgage is the place to look.” He notes that individuals cannot simply initiate a reverse mortgage without approval. They must pass a required credit check, which analyzes whether or not they are able to make payments for taxes and insurance going forward. If they do not pass the test, they will not get a loan.

Joe Connell, president of Retirement Plan Partners in Maple Grove, Minnesota, and the 2014 PLANSPONSOR Retirement Plan Adviser of the Year, considers that a reverse mortgage can be ideal for a “married couple who is not worrying about their estate, is in need of additional income, has lived in their home and doesn’t want to vacate, and doesn’t have serious health issues.” Provided that the loan is done under the right circumstances and the participants stay healthy and stay in the home for a long time, Connell believes a reverse mortgage has the potential to give them enhanced quality of life in retirement.

Sass and Connell both note that an individual is required to meet with a government-approved counselor in order to get a reverse mortgage loan. “You need to understand the benefits and alternatives of the loan, as well as how to avoid scammers,” Sass says. He adds that a lot of problems stem from the fact that “all of a sudden you have a lot of cash and there are scammers that want to sell to you. Not all retirees are as careful and as savvy as they should be.”

A key factor in deciding whether or not take a reverse mortgage is determining how much the individual can get. The more valuable the house, the lower the interest rate, and the older the individual, the more he or she can get from a reverse mortgage. The stipulation is that no more than 60% of the gross amount of the loan can be borrowed in the first year, unless it is used to pay off a mortgage or make required repairs. In that case, the mortgage insurance fee at closing rises 2% (from 0.5% to 2.5%), Sass says.

Fees are another key element. “Costs are quite high for reverse mortgages,” says Connell. He lists fees, interest rates, and the current economic environment as obstacles when taking a reverse mortgage. “Lenders are reluctant to give home equity loans to seniors,” he adds.

Fees for reverse mortgages may include ordinary mortgage fees, including for example, legal fees; an origination fee to cover lender expenses; mortgage insurance to insure the participant gets all promised payments and the bank is repaid even if the value of the house, when sold, is less than what is owed; and a service fee to cover projected servicing costs, which is often waved. A retirement planning guide published by the Center for Retirement Research at Boston College provides an example. While fees vary by lender, reasonable estimates on a house worth $250,000 are: $2,500 for ordinary fees; $4,000 for an origination fee; and $1,250 for mortgage insurance. This totals $8,250 in fees, which is 3.3% of the house value.

A plan adviser’s understanding of reverse mortgages, and the initiative advisers take with employees or retirees who are interested in taking one, is crucial. Connell suggests that plan advisers attend the meeting between their client and the government-approved counselor in order to better understand the situation. He also suggests using the resources of an affiliate or specialist.

“When you get involved with real estate there are specialists out there to bring to your client relationship,” Connell says. “You can’t be an expert in every area. It would add value if you had that specialist with you.” In addition, Connell listed several resources for advisers and retirement plan sponsors to gain knowledge about reverse mortgages, including eldercare.gov (a public service of the U.S. Administration on Aging), www.ncoa.org (National Council on Aging), and aarp.org (American Association of Retired Persons). “It’s a timely topic and an option that sometimes people don’t consider,” suggests Connell. “Advisers should understand it and be able to assist their clients.”

The federal government’s FY 2013 HECM Actuarial Review reveals that there were 61,296 endorsements totaling $14.88 billion in 2013. HECM borrowers represent about 0.9% of all households with at least one member age 62 years or older (according to AARP). If this ratio is maintained, the number of reverse mortgages will continue to increase with the expected growth in the senior population.

Additional guidance about how to effectively deploy HECMs is available in a white paper from the Center for Retirement Research, penned by Sass, Alicia H. Munnell and Andrew Eschtruth.

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