Right Size

Do not try to be all things to all plan sponsors. Plan advisers should pick a niche and focus on serving the specific needs of that market segment, sources say. Adviser PSA Financial Services Inc. targets plans with between $20 million and $200 million in assets. “I definitely think you have to have a line in the sand,” says Jania Stout, practice leader of PSA’s Fiduciary Consulting Group in Baltimore. Sponsor needs vary depending on a plan’s size, she says. Her firm’s interest in working in-depth with sponsors on fiduciary processes, for instance, is good for midsize plans but “a little too much” for micro plans that have fewer resources available for plan oversight, she says.

Thus, depending on the plan’s market niche, an adviser’s value proposition to sponsors varies. “I go into [potential clients], and I listen to what their issues are. That’s the most important thing,” says Susan Conrad, vice president at adviser Plancorp LLC in St. Louis. Conrad generally focuses her value proposition for sponsors around how Plancorp can help in three main areas: plan design, fiduciary oversight and employee education. Here are guidelines for how to serve the unique needs of the micro, midsize and mega markets.

The Micro Market

Business owners with micro plans often like to work with an adviser they already know and trust, says Michael Kim, Concord, California-based senior vice president at AssetMark Inc., a provider of investment and consulting solutions to independent financial advisers. For advisers who want to work with retirement plans, serving those that have less than $10 million in assets and fewer than 100 participants “really is a sweet spot,” he says.

Advisers have more ability to help with plan design here than they may initially believe. “These plans often are just sold on investment products, when there is a great opportunity in plan design,” Conrad says. For example, an adviser can help implement a “new comparability” design that allows sponsors to boost contributions for key employees. “In the micro market, [plan sponsors] want to maximize what the owners or executives can receive,” she says.

Steve Davis, national sales manager for Guardian Retirement Solutions in New York, agrees about the potential with micros. “When you get plans with less than $5 million, plan design is your candy store,” he says. “Advisers can add substantial value there.” These employers want a plan that helps all employees, he says, but they particularly appreciate a design that enables key employees to maximize their ability to save.

Once they have the right plan design, these employers need help with the fiduciary fundamentals. “They struggle more with the basics,” Davis says. “Smaller plans don’t have the luxury of forming a committee to monitor the plan. That’s where an adviser can help.”

Micro-plan sponsors need help understanding what they should do in their role, says John Ludwig, a financial adviser with LPL Financial in Indianapolis. They need support to know how to keep the plan running smoothly on a daily basis and what fiduciary duties they have to fulfill. They also require guidance on methodology, to be told what forms to file, how to make payroll integration work smoothly and how to answer employees’ questions about the plan.

Additionally, micro-plan sponsors like to have an adviser’s assurance that they have well-performing funds on their plan’s investment menu, Stout says.

Jason Roberts, CEO of the Pension Resource Institute in Manhattan Beach, California, suggests evaluating how to help plans with their fiduciary duties in terms of three distinct areas of risk: investments, service providers and plan administration. In selecting investments and providers, micro sponsors benefit from an adviser’s help in information gathering and evaluation, establishing decision criteria and documenting their decisions. “It’s that ‘quarterbacking’ that is extremely valuable,” he says.

On plan administration, an adviser can help a micro plan introduce a process that ensures consistency, Roberts says, such as one for preparing Form 5500. “That quarterbacking is not sexy. It’s not flashy. But to help plan sponsors identify where the gaps are is a very appealing value proposition to them.”

Micro plans also benefit from an adviser’s personal touch in regard to employee education. These plans implement automatic enrollment less often than larger plans, Davis says, in part because sponsors worry about the amount of work involved. So having “boots on the ground” to provide in-person employee education matters more, he says, because someone has to help convince employees to participate and save enough. “Face-to-face in the micro market is more important than [in the] upmarket,” he says.

But many advisers fear crossing fiduciary lines if they advise individual participants on their investments. They may also believe that they cannot scale that service well. So instead, Roberts suggests advisers focus their one-on-one meetings with micro-plan participants around the individual participants’ retirement goals and savings gaps, then teach them to identify how much they actually need to save. If an adviser can have that dialogue with participants and convince low-savers to increase their deferrals, he says, “that’s going to ratchet up these plans” and help demonstrate the adviser’s worth to the sponsor.

The Midsize to Large Market

Midsize plans—those with approximately $50 million to $500 million in assets—can be more strategic about plan design than micro plans. “This market is all predicated on, ‘Is this a proactive plan sponsor or a reactive sponsor?’” Roberts says. In terms of how to serve the plan, “if the sponsor is less proactive, you need to, in some sense, treat that sponsor like a small-plan sponsor.” But with more proactive sponsors, advisers have an opportunity to help implement features such as auto-escalation and stretch matches.

An adviser can work with a midsize sponsor to look more closely at the demographics of its employee base, Davis says.

Helping improve plan design gives an adviser the chance to make a tangible impact on the moderately sized participant base of these plans, notes Stout. “In the midmarket, plan design is much more powerful,” she says.

Further, midmarket plans generally have more internal resources for fiduciary oversight than micro plans. “The line where you start to see bigger staffs is about $15 million to $20 million in assets,” Ludwig says. Resources increase even more for plans with more than $50 million in assets, he adds.

“The midsize plans have some structure,” Ludwig says. “What they’re interested in is, ‘Here is our structure. What are we missing? What aren’t we doing that we should be doing?’” These sponsors are more proactive and may want fiduciary education about their roles and responsibilities. For an adviser offering that education, it is not just about telling them, “‘you’re a fiduciary,’” he says. “We build their knowledge [and] walk them through things like what they need to be doing in selecting and monitoring investments.”

Advisers can help midmarket plans set up more disciplined fiduciary procedures, Conrad agrees. “Employers sponsoring plans in this segment need help with building a process around their fiduciary responsibilities and executing it,” she says. That means helping them, for example, create an investment policy statement (IPS), form and structure a plan committee, then ensure documentation of the committee’s work and retention of the appropriate files, she says. “We structure the retention process for them, so if they’re audited, they’re ready for it.”

These employers often have staff members with the expertise to help plan administration run more smoothly, and they can help an adviser with provider searches. “You start to see people who can really help with much of the information gathering,” Roberts says. “Service provider due diligence becomes more scalable.”

Some midsize plan sponsors have enough fiduciary savvy to want an adviser to serve as a named fiduciary on investment selection and monitoring. “The plan may insist that [the adviser is] a fiduciary,” Roberts says. “Once you cross that $20 million to $30 million mark, you start to see questions on RFPs [requests for proposals] related to fiduciary status.”

When it comes to employee education, the needs of a midsize plan become more complex than those of a smaller one. “Often, they have multiple locations and may have international locations,” Conrad says. For an adviser, that can rule out doing all employee education in person. So to add value, she says, advisers might think about alternatives such as producing a webinar series—perhaps an introductory session customized for each plan, then subsequent material focused on basic investing or the importance of preparing for retirement. “Advisers often rely on employee education provided by the recordkeeper, but today’s technology can make this customized touch very cost-effective,” she says.

PSA Financial Services, which focuses on midmarket plans, has developed a scalable new financial planning education program it calls “Retirement Hero.” The series seeks to show participants how to save more for retirement by getting their budgets in order, eliminating personal debt and understanding what they will need to save to achieve their retirement goals. PSA advisers conduct live webinars, available for the firm’s 85 sponsor clients to offer their employees at no additional cost, Stout says. Participants also get a personalized gap analysis of their retirement savings and may ask follow-up questions by email. The program thereby blends both general information that is scalable among all clients and some tailored to each participant.

The Mega Market

Plans with $1 billion or more in assets have greater internal resources as well as staff members dedicated to the retirement plan, says Robert Haverstrom, Houston-based head of client relationship management, plan sponsor experience in retirement plan services at Lincoln Financial Group. One staff member may work only on employee benefits communication, another just on enrollment and another on plan compliance, for example. “They’ve usually got a very sophisticated infrastructure,” Ludwig says.

Likewise, mega plans often work with multiple consultants and advisers who have specialized roles, says Roberts. “So the adviser is doing much less, but the stakes are much higher: One wrong move affects thousands of participant accounts.”

Despite the higher stakes, these sponsors often want to learn about innovative plan design and gravitate toward early adoption of automatic enrollment and similar features, Haverstrom says. “The large market tends to lead the way in terms of thought leadership and new plan-design features,” he says.

Mega plans pay closer attention to how their design compares with that of other plans, and advisers have a chance to help these mega plans with benchmarking. “They also are very much into data-mining and metrics,” Haverstrom says. These plans are more likely to want an in-depth analysis of different participant groups’ retirement savings, for instance.

They also already know the basics of fiduciary oversight. “At the larger end of the market, generally, they have a more formalized governance process,” Haverstrom says. “They have a committee, and they have all the documents in order.”

Not surprisingly, then, mega-plan fiduciaries delve into more specifics on investments. “When you move upmarket, half of a plan review is spent looking at the investments,” Haverstrom says. “The majority of these plan sponsors have an IPS, so much of the review is driven around the criteria of the IPS.”

These sponsors “want a much more robust investment analysis,” Conrad says. For example, “If they are using mutual funds, they are more likely to be digging into the underlying securities, as opposed to just looking at the funds’ overall results.”

Mega plans also want to explore options beyond mutual funds, which can lower investment fees for participants; an adviser can educate them about their options. “Part of it is [explaining], ‘Here is what a collective trust is; here is what the differences are compared with mutual funds,’” Ludwig says.

The in-house expertise at mega-plan sponsors makes it likelier that an adviser will work on targeted assignments to help with fiduciary oversight than if he consulted on smaller plans. “These are companies where, on the administrative side, they have tremendous internal resources,” Roberts says.

For example, an adviser may be retained to help with a provider selection process. Or a billion-dollar plan may want an adviser to do a benchmarking study focused just on its target-date funds (TDFs), Ludwig says.

The emphasis larger plans place on targeting extends to employee education. “When you get into the mega plans, they’re really customizing the entire employee experience,” Ludwig says. Advisers can help with customized education campaigns.

For instance, mega plans often want to use their plan data-mining results to launch educational campaigns for employees who underutilize their 401(k) plan—e.g., those contributing too little to get the full employer match, Haverstrom says. “It really allows you to pinpoint your target audience and pinpoint your message.”

The more sophisticated needs of mega plans mean they tend to choose large advisory and consulting firms to work with, says Kim. These larger firms have the expertise and technology to construct a customized participant website for a plan. Larger firms “have sort of cracked the code of scaling communications and working with thousands of participants throughout the country and the world,” he says.