Exit Sign

Here comes the surge of Baby Boomer retirements—and, most likely, retirement plan rollovers. What happens now?

“Advisers need to decide, long term, what business they are in. If they are truly in the business of helping people create a paycheck for life, it doesn’t stop when they retire,” says Charles Epstein, principal at adviser Epstein Financial Services in Holyoke, Massachusetts, and founder of The 401(k) Coach Program. “Advisers are focused on the plan sponsor side of the equation. The other side of the equation is participant success, and I think the pendulum has swung and advisers have noticed: ‘Gee, we really need to impact participant success. How am I going to do that, and how am I going to get paid?’”

The key to rollovers, experts say, is establishing strong, long-term relationships—with both plan sponsors and plan participants.

Rollovers loom as a huge market. Individual retirement account (IRA) assets totaled $5.1 trillion by mid-year 2012, accounting for 28% of U.S. retirement assets, according to Investment Company Institute (ICI) statistics cited in a Government Accountability Office (GAO) study on rollovers released in March.

Many departing participants need help figuring out what to do with their balances, experts agree. Seventy-one percent of investors with retirement money in a former employer’s plan have kept those assets there for five or more years, according to a study released in February by Cogent Research, a division of Market Strategies International. “There’s a lot of stagnation,” says Linda York, a Cambridge, Massachusetts-based vice president at Cogent. Many participants “haven’t really done any research or talked to anyone about their options,” she says.

Meanwhile, the Department of Labor (DOL) is considering changes to the fiduciary definition, which could impact advisory firms doing rollovers. Currently, “we are in a gray area,” says adviser Steven Glasgow, a Nashville, Tennessee-based senior vice president at Avondale Partners LLC. “The DOL really wants to eliminate conflicts of interest. What is likely to come out of all this is that eventually there will be some hard-and-fast rules [so this is not] a gray area. For now, all an adviser can do is document, document, document and disclose, disclose, disclose.”

For an advisory firm to do both plan and rollover work, the key “is how you navigate the regulatory requirements of moving from one world to the other,” says John Curry, senior director of marketing at Raleigh, North Carolina-based CAPTRUST Financial Advisors. “But if you really focus on helping participants on their retirement readiness and thinking like a fiduciary, it tends to simplify it and guide your actions.”

Approaching Sponsors

Before approaching plan sponsor clients to discuss advising their participants about rollovers, advisory firms need to think through how they will handle rollovers. “I’m a big believer in specialization,” Epstein says. So to do rollover business, it works best for a retirement plan adviser to have staffers totally focused on wealth management along with staffers totally focused on plan fiduciary work, he says. “That’s the future model; there’s a huge opportunity for that kind of synergy to happen.”

CAPTRUST, for instance, has an institutional services division and a private wealth services division. “We think this is a big part of our value—the ability to juxtapose these two things,” says Mike Hudson, senior director of institutional consulting for the firm.

Advisers also should know whether they want to handle rollover business extensively or as a niche. “There are some folks out there saying that, with the right disclosure, you can solicit rollovers. That’s probably true,” Glasgow says. “But our wealth management business is not really equipped to handle a lot of small accounts.” Avondale does not actively solicit rollovers from plan participants, he says, but, when high-net-worth participants initiate one, the company will handle their rollover and work with them as wealth management clients.

Pensionmark Retirement Group initiates distribution-option conversations with plan clients. “We’re very proactive,” says Troy Hammond, president and CEO of the Santa Barbara, California-based advisory firm. Assisting with distributions “is one of the services that we’ve offered for 25 years, and plan sponsors really appreciate it,” he says. “We kind of have a cradle-to-coffin approach.” Pensionmark encourages new employees to roll balances into their current plan from accounts at previous employers, and then helps them understand their distribution options when they leave. “Part of our service is that we help people get in and out of a plan,” he says.

Houston-based MBM Advisors Inc. also actively approaches employers about rollovers, CEO Lindsey Black says. “That’s really part of our initial conversation” with new plan sponsor clients. “We’ve never had a client not want us to talk to participants about rollovers,” she says. “Employers are simply looking to partner with firms that are going to put the needs of their participants first.”

CAPTRUST talks to sponsors about rollovers in the much larger context of education and advice for participants throughout their careers, Curry says. “The whole fixation on the rollover event [by advisers] is losing sight of the forest for the trees.” CAPTRUST educates participants over a long period of time, he says, and, as they leave, the firm seeks to make sure they understand their distribution options. It accepts rollover business but does not actively market it to participants.

Experts advise establishing clear ground rules with sponsors. “Sponsors have fiduciary concerns,” says J. Spencer Williams, president and CEO of Charlotte, North Carolina-based Retirement Clearinghouse LLC, which provides a platform for rollovers and account consolidation. Sponsors worry that, by allowing an adviser to work on rollovers out of the plan, “they are endorsing the adviser, and that makes them a fiduciary even after people leave the plan,” he says.

So, some sponsors may balk at the idea. “There are clients who say, ‘We don’t want you taking any rollover opportunities from our participants.’ And that’s fine with us,” says adviser Jessica Espinoza, a vice president at Meltzer Retirement Plan Services in Bethesda, Maryland. “It doesn’t happen very often. And I do have clients who said, ‘We don’t want your rollover service,’ and then changed their minds later.” That comes after building up a history of trust and impartially educating participants, she says.

Epstein suggests addressing sponsor concerns head-on. For example, make clear that any on-site educational sessions that discuss rollovers will mention only their availability not their advisability. “You’re doing an education meeting. Don’t advise people to take rollovers at the workplace,” he says. “You can make them aware of what’s available, but do not advise people on what to do.”

“One of the keys is not meeting with participants about a rollover at the plan sponsor’s place of business,” Hammond says. “That could be deemed an endorsement by the sponsor, so we do it off-site.”

Pensionmark educates active participants about distribution options when it does on-site group meetings. But, when participants actually leave, it has arranged for its broker/dealer (B/D) LPL Financial to do rollover education. “So, we are bringing in a third party,” Hammond says. “We’ve taken the stance to add this additional layer of protection to ensure we are avoiding conflicts of interest.” LPL sends departing participants written information about their distribution options, discussing the pluses and minuses of each. If participants want, LPL’s rollover team also will talk with them by phone. “And if a participant says, ‘I want to work with Pensionmark on a rollover,’ LPL refers them back to us,” he says.

In addition to setting ground rules, sources suggest making written disclosures to sponsors straight off. When Pensionmark signs a new plan client, Hammond says, it gives the sponsor a disclosure outlining what it will and will not discuss with participants overall. “That is an upfront, one-time disclosure before we have any education meetings,” he says. LPL’s legal department puts together Pensionmark’s comprehensive disclosure document. “It discloses that we’re going to educate participants about rollovers and that, if participants ultimately do a rollover with us, our compensation very well may differ from what we’re getting compensated on the plan,” he says. In addition, participants receive a disclosure that outlines their rights as participants in regard to their distribution options.

Working With Participants

A participant’s rollover business usually comes after an advisory firm has built a long-term, trusting relationship, sources say. “Engaging participants is a five-, 10-, 15- or 20-year effort,” Hudson says.

One-on-one meetings play a big part, over time, in establishing the crucial adviser/participant relationship, Epstein says. For an adviser, after years of helping active participants, working on their rollover business can happen as a “natural evolution” of that relationship, he says. “If you do that year in and year out as an adviser to the plan, the relationship flows and the money flows.”

For active participants at all stages, Meltzer provides one-on-one, on-site education, done by salaried wealth management advisers not on commission. “We don’t cross into outside assets or go beyond setting up a basic asset allocation based on a risk-tolerance questionnaire completed by the participant,” Espinoza says. If a departing participant wants to do a rollover with Meltzer, that person signs a document acknowledging that he has become a client of its wealth management division, separate from Meltzer’s plan work.

“A lot of individuals don’t know where to turn for advice,” Espinoza says. “We’ve found that we don’t have to aggressively approach anyone about rollovers. We just go out and get in front of participants with education.”

MBM starts explaining to participants all of their distribution options—not just the rollover of their assets—beginning at a new client’s first employee group meeting. The group sessions blend talk about the accumulation and distribution phases, Black says. “Let’s say the meeting is an hour. We don’t spend 20 minutes talking about rollovers. We may have a slide or two.” MBM also sometimes covers distribution options when it does on-site, one-on-one meetings once or twice a year at clients’ workplaces.

Black also stresses the need develop a relationship long before a participant decides to leave. “We don’t think that it ever works when you go in at the end,” she says. “Because we have face-to-face meetings with participants over time, people get to know us well and really rely on our expertise. We have found that they have such a good comfort level, we are not asking them to do a rollover with us: They are asking us.”

The comfort level matters. A 2012 Cogent study asked 401(k) participants about the likelihood they would do a rollover with their 401(k) plan’s current provider. “The primary driver was the perception that the provider is easy to do business with,” York says. “That speaks to the fact that you want to nurture these relationships while people are in the plan. Really, what folks are trying to do is take the path of least resistance, rather than establishing a brand-new relationship.”

Most participants do not have their own adviser. “Probably 90% of the folks we deal with do not have an advisory relationship,” Williams says.

As they retire, Hudson says, people want an adviser’s help to make the transition and the process of drawing down retirement income more understandable and simpler. “At that point, you’re really trying to add value by explaining the choices they’ve got,” he says. “They want a quarterback to help them execute. It’s complex to turn a lifetime of savings into income. They need help on what is the cheapest, least risky way to meet their goals.”

—Judy Ward

Rollovers: Cross-Selling Legal Concerns

Rolling over previous 401(k) balances into an existing plan, as well as retiring participants’ rollovers into an outside individual retirement account (IRA), offers a tremendous opportunity for retirement plan advisers. However, the Department of Labor (DOL) deems an adviser-guided rollover by a retirement plan’s fiduciary a prohibited transaction. Still, experts say, it is possible for a retirement plan adviser to guide a rollover—with care and at arm’s length.

The DOL provided guidance in 2005 on giving distribution guidance to participants. “That advice by the DOL says that, for a nonfiduciary, it is OK to discuss with a plan participant how to take a distribution and invest it,” says Nancy Gerrie a Chicago-based partner at law firm McDermott Will & Emery. “But, if you are already a fiduciary, that exemption does not apply to you.”

The trouble is, even if a retirement plan adviser is not expressly a 3(21) or 3(28) fiduciary to a plan, “any interaction you have with clientele could be perceived by [the] DOL as a fiduciary action—and you are an accidental fiduciary,” says Marcia S. Wagner of the Wagner Law Group in Boston. Guidance and interpretations from the DOL, not to mention court rulings, Wagner says, make it clear that the DOL holds retirement plan advisers up to its fiduciary standards whether they are outright 3(21) or 3(32) fiduciaries or not.

The DOL’s main concern is that a plan fiduciary could possibly fail to meet his responsibilities to the plan and its participants by steering a participant’s assets into higher-paying funds or investments, Wagner says. “The department’s concern is the ability to exploit trust and the potential for abuse,” she says.

Likewise, the Financial Industry Regulatory Authority (FINRA) recently issued an investor alert, “Smart 401(k) Investing—Moving Your 401(k),” which warns investors to watch out for potentially higher fees and for adequate investment options in any new savings vehicle.

‘Threading the Needle’

Steeped in an advisory opinion that the DOL issued on a 1996 Supreme Court case, Varity Corp. v. Howe, however, is a way to “thread the needle on retirement plan rollovers,” Wagner says. “You can differentiate your fiduciary and nonfiduciary services in your service agreement.” An adviser could also require both the plan sponsor and participant to sign an acknowledgment agreement that a rollover he recommends is separate from and unrelated to the plan services.

It is also critical for any retirement plan adviser who discusses rollovers with a plan participant to clearly state both the pros and cons of consolidating assets—covering ease of management, fees and investment lineup selection, Wagner says. Additionally, it is advisable to handle the rollover in a setting outside the plan sponsor’s offices—i.e., at the adviser’s offices, she says.

Do not promote rollover IRA services at plan meetings, only at one-on-one consultations, Wagner says.

At plan meetings, agrees Charles Epstein of Epstein Financial Services, “You can talk about the availability of rollovers but not the advisability. Do not indicate rollover IRA services are part of plan services.” 

—Lee Barney