As retirement plan advisers progress in their practices, they tend to work with bigger plans that generate larger plan fees. But the small and micro defined-contribution markets represent a potential blue ocean, with one big inhibitor.
Since the 2008 economic crisis, RPAs have tended to focus on plans with at least $3 million, because their time was limited. Employers pay more attention to plans of that size, making them better and more attractive clients.
The micro market, for plans with less than $1 million in assets, is dominated by payroll providers; service is spotty and turnover is high. Insurance record keepers working with third-party administrators are the most popular providers in this part of the market, but they’re expensive, leaving less room for the RPA to charge a healthy fee.
There are three major trends that could make the small and micro DC markets more attractive to RPAs.
As with health care, people expect retirement plans to be available at work. City, state and federal governments are pushing businesses of a certain size to offer them.
Given that encouragement, millions of organizations will flood the market, and few are likely to choose the government option. Though the jury is still out on whether pooled employer plans or the coming “group of plans” will take off, they have the potential to make it easier and more financially attractive for RPAs to work with smaller plans.
And while startup and very small DC plans may not seem attractive, the second trend could change all that.
There is a convergence of wealth and retirement at work. Though we have yet to charge for financial wellness, there is no doubt that retirement plans offer advisers unique access to people who can afford traditional wealth management, especially business owners and senior executives.
While building a business, they may not have attracted wealth managers because they put so much of their personal money into it. But many now have more assets, to which RPAs have unique access, especially when those business owners decide to sell.
Remember that participant fees will eventually dwarf plan fees and the traditional “triple F” functions, or fees, funds and fiduciary, which have mostly been automated. And the trend is for RPAs to charge more like attorneys and CPAs than money managers, which could mean hourly or activity-based charges.
Firms built on modern technology, like Guideline, Smart and Vestwell, have attracted hundreds of millions in funding and are each in their own way offering solutions that traditional record keepers cannot. Not only can these firms more easily incorporate wealthtech, making convergence more seamless, none of them are asset managers and therefore they’re more willing to offer access to participant data.
Guideline, with 7,000 plans sold in 2020, seems to be replacing payroll providers with a cost-effective, high-tech service for simple and startup plans. Smart Pensions is focused on pooled employer plans, while Vestwell is looking to partner with broker-dealers, record keepers and advisers. Rather than trying to replace or disrupt traditional record keepers, they are all supplemental and complementary.
However, plans are sold — not bought. How do RPAs that don’t prospect smaller organizations find opportunities and make the closing process easier and faster?
For RPAs owned by workplace benefits firms, the answer is simple, even while the execution is not. For others, building a network of benefits brokers, lawyers and bankers is an option. That takes thought, time and work, meaning that advisers need to move from being practitioners to businesspeople.
The biggest opportunity for RPAs is to build a network of referring advisers, more of whom are realizing that dabbling in the retirement plan market is unwise. It’s easier for RPAs that are part of a larger network, especially when it comes to sharing fees. But considering the move to RIAs, the issues are less complicated.
A few savvy RPAs are buying up the retirement practices of the dabblers. Whether partnering or buying, RPAs may share or even cede participant revenue, taking over committee work. This is especially true for those that do not have wealth management capabilities.
The small, or sub-$3 million, and especially the micro 401(k) and 403(b) markets are about to explode, driven by government mandates. Convergence, technology and PEPs make them more viable for RPAs. It is a blue ocean, but RPAs may need to learn some new strokes.
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.