Thinking Efficiently

 Ask several advisers what the definition of a small retirement plan is and you will get different answers.

For example, at recordkeeper Ascensus, Kathleen Connelly, executive vice president, in Dresher, Pennsylvania, says she considers that market segment to be plans of $10 million or less, with those of $1 million or less being the micro plan market.

Adviser Jason Chepenik, managing partner of Chepenik Financial in Winter Park, Florida, however, considers any plan of $4 million or less as small.

Regardless of the specifics of size, serving this market requires an adviser to be far more proactive and hands-on than with larger plans.

Keith Clark, a partner at DWC ERISA Consultants in Minneapolis, and an adjunct professor at the University of Minnesota Carlson School of Management, says when it comes to the work of the plan, it might be less about assets than the number of participants. For example, once a plan exceeds 100 participants, a financial audit must be filed along with a Form 5500. Here, advisers can help retirement plans find a qualified auditor and guide them along the audit process.

Chepenik agrees that the number of employees in a plan can make a difference in adviser services. “If it’s a small company with 50 or fewer employees, the HR [human resources] person does payroll, bookkeeping and many other duties,” he says. “The person has no experience administering retirement plans. Advisers have to do a lot of teaching, directing them to [service providers] and keeping their stress down.”

He notes that sometimes the plan is small in assets but has hundreds of employees. “Usually, there’s a specific HR or payroll function for the plan. The adviser may still have to do some teaching, but it’s a little easier,” Chepenik says.

According to Connelly, that is the overwhelming difference between small and large plans; large plans typically have staff who focus on the retirement plan—people with knowledge, some level of expertise and an internal structure to support them.

“In the small-plan market, the retirement plan is someone’s part-time job—the owner’s or someone the owner delegates it to—and he doesn’t understand what the company is trying to do with the plan,” she observes. “Small plans take a combination of time and knowledge. Good advisers and plan providers can add value.”

The Needs of Small Plans
Clark says that small-plan sponsors may be operating without a plan administration or investment committee; advisers can help them act as if they have one. A best practice for advisers is to have quarterly meetings with the plan sponsor. Advisers can also help with issuing requests for proposals (RFPs)—not just to select or benchmark service providers, but also to benchmark fees.

Connelly says the first thing advisers can do is have a conversation with those at the company about what they want to get out of their plan. “Advisers can first help them set goals and then provide a road map to get there,” she says. “They can help set up an investment policy statement [IPS] or help with plan design features to achieve goals.”

She adds, if the small-plan sponsor is looking to make sure all participants will be comfortable post-retirement, it will probably want to consider automatic enrollment and a qualified default investment alternative (QDIA). If the goal is just to check a box saying, “I have a plan for recruiting,” and the sponsor wants to minimize the amount spent on the plan, a different plan design will be needed.

When Chepenik talks of teaching small-plan sponsors, he says this could be as basic as explaining what a 401(k) is, how deductions work or by when contributions must be invested. More advanced education would cover Form 5500 and financial audits or educating about actual deferral percentage (ADP)/actual contribution percentage (ACP) testing and how this may affect highly compensated employees.

He also says it is important to inform small-plan sponsors of the costs involved in running the plan—the recordkeeping fees, auditor fees and investment fees.

Clark says small plans are more often top-heavy than large plans, so they may have to provide a qualified nonelective contribution (QNEC). In addition, the ACP test is more of an issue. “We can help small-plan sponsors design a plan to max out deferrals at a far lower cost if they use a cross-testing formula for nondiscrimination testing,” he says.

Advisers can also help sponsors avoid common errors, he says. For example, the sponsor may neglect to deposit deferrals in a timely manner or miscalculate the safe-harbor match. According to Clark, micro plans usually need more compliance education.

Further, advisers can make an impact by providing education to, and getting to know, participants, Clark says.

With all the needs of small and micro plans, it is understandable that they may demand more of an adviser’s time. Clark says how advisers approach the two key tasks performed for the plan sponsor—monitoring the investment menu and communicating to participants—determines how much time they spend on the plan. Both Clark and Connelly say start-up plans require the biggest time investment.

Still, Clark says, more software is available now to aid in serving small plans than even five years ago. He says, since the Department of Labor (DOL) presented its final fiduciary rule, he has been seeing software firms jump into an aggregator role. At a minimum, this means they are integrating recordkeeping service provider data with standard investment reporting, he says. “In a nutshell, these service providers are offering the adviser one site for all their reporting needs to satisfy the fiduciary role for defined contribution [DC] plans.”

Connelly points to the expansion of digital services that help advisers serve small-plan sponsors—for example, mobile enrollment and participant education that is provided on digital devices. According to her, major broker/dealers (B/Ds) and wirehouses are also creating tools and services for advisers. Both she and Chepenik cite LPL, which has built out an entire suite of tools for advisers in the small-plan space.

Connelly also notes the advantages if the adviser signs on as a 3(38) investment manager for the plan, calling it a win-win for both. “The plan has additional protection, and it is helpful if the adviser is using the same lineups for his or her [other] small-plan business,” she says.

Pricing can be a challenge when these plans can take up so much time, but Clark and Connelly say advisers typically vary what they charge, tying basis points (bps) to asset level, starting at a minimum fee of $5,000.

Advisers often hear that small plans buy only on price, and, while some do overweight cost in their decisions, Connelly says, for the last several years her firm has seen many willing to pay for the value advisers contribute. “They may be price-sensitive, but not all are buying cheap,” she says.

Chepenik recommends that advisers be careful which small clients they take on. For example, does an adviser want to do a lot of work for a company that may be acquired in a year? In addition, he says, “If the plan sponsor is not committed to get employees into the plan and promote it, it becomes my problem, and I don’t want it,” he says. “You have to be intentional in your business plan and specific about which clients you pick up.”

Key Takeaways

• Small plans may need more guidance and education.
• Advisers should be diligent about helping small plans avoid common errors.
• Today there are a host of software programs, tools and digital services to make it far more efficient for ­advisers to serve small plans.