Making the 401(k) Business Scalable & Profitable


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This White Paper is provided by PRI (Jason Roberts) and Guardian. In the eight (8) pages it discusses:]
1. How to leverage Service Providers
2. Identify 401(k) Opportunities
3. Myths vs. Realities
4. Determining Your Role

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Making the 401(k) Business Scalable & Profitable

  1. 1. For Producer/Broker use only. Not for use with the general public.866.390.7268 | The Guardian Insurance & Annuity Company, Inc. 7 Hanover Square, New York, NY 10004-4025 This document is not intended by The Guardian Life Insurance Company of America, The Guardian Insurance & Annuity Company, Inc. or any of its employees or agents to be considered investment, tax, or legal advice. The Pension Resource Institute is not an affiliate or subsidiary of The Guardian Life Insurance Company of America (Guardian) or The Guardian Insurance & Annuity Company, Inc. (GIAC). Jason C. Roberts, Esq. CEO, Pension Resource Institute ® Leveraging Service Providers: Making 401(k) Business Scalable and Profitable GUARDIAN RETIREMENT SOLUTIONS™ Small business 401(k) plans provide a unique platform for financial professionals to increase revenue, diversify their client base and establish deeper, more rewarding relationships with business owners, company executives and other plan participants. Plan sponsors are increasingly looking for assistance in selecting retirement plan products and services that will lessen administrative burdens, manage risk and save the business owner valuable time and resources. Employees need help understanding the benefits of participating in the plan and education to help evaluate their retirement goals and the savings rates required to meet their needs. Participants may also need assistance with their investments held outside of the plan, including potential IRA rollovers. Financial professionals, even those who do not specialize in the qualified plan business, have individual clients that own small businesses or are decision-makers regarding their company’s retirement plan. Leaving 401(k) business on the table opens the door to competitors, who may use the 401(k) plan as an access point to your individual clients. Qualified Plans are the Tip of the Iceberg Relationships are key. While you may not need to understand all of the components of serving 401(k) plans, retirement products have evolved significantly in recent years. If you work with appropriate service providers that deliver turn-key solutions for your clients, you may be able to shift many of the technical and time consuming activities to professional retirement plan service providers, leaving you to focus on what you know best — helping individuals, plan participants and business owners save for retirement. 401(k) Products Rollovers,Mutual Funds andAnnuities Long-Term Care Insurance, Disability Insurance,Life Insurance Highly Compensated Employees, Other Plan Participants THIS GUIDE WILL CONSIDER THE FOLLOWING: 1. Identify 401(k) Opportunities 2. Myths vs. Realities: What Do You Need to Know? 3. Determining Your Role (Risks and Rewards) 4. Evaluate and Leverage Service Providers Effectively
  2. 2. 2 For Producer/Broker use only. Not for use with the general public.866.390.7268 | 1. Identify 401(k) Opportunities a. Understanding Compensation Some financial professionals may have the misperception that time spent servicing a 401(k) plan is disproportionate to the compensation available from the plan. Profitability, however, is a function of your revenue less expenses, and it is possible to increase your revenue opportunities and lower your expenses if you understand a few basic concepts. Revenue is based upon the scope of your services. If properly structured, financial professionals can be compensated in two ways: • From the plan (commissions and/or 12b-1 fees); and • From participants individually (who seek out additional products and services for assets held outside of the plan or through IRA rollovers — assuming the financial professional is not acting as an ERISA Fiduciary — see discussion in section 2). b. Plan Opportunities Are Significant More than 50 million Americans now participate in employer-sponsored 401(k) plans with assets totaling roughly $3 trillion. By 2015, total 401(k) assets are expected to reach $4 trillion. The majority of opportunities lie with small businesses: • 90% of all 401(k) plans are small businesses with less than $10 million in total plan assets; • 80% of all 401(k) plans are in the micro market, holding less than $2.5 million in assets Plan Participants Plan Sponsor and/or Senior Executives Financial Professional Earn compensation on plan assets Engage Plan Participants Retirement Plan Engage Senior Executives Source: Abstract of 2010 Form 5500 Annual Reports, PDF, (Nov. 2012) WHY 401(k)? • Jump start referral opportunities • Scale client prospecting and gain access to highly-compensated employees • Grow your revenue while outsourcing day-to-day duties • Assist individuals with retirement income planning and IRA rollovers • Deepen and protect your client relationships
  3. 3. 3 For Producer/Broker use only. Not for use with the general public. 866.390.7268 | Recent downsizing and layoffs affecting large corporations have led to a surge in small business start-ups and additional opportunities for financial professionals servicing micro to small 401(k) plans. Many small business owners prefer to work with someone they know. When screening financial professionals to help with retirement plans: • 81% of plan sponsors rely upon referrals from colleagues, peer organizations or service providers; and • 60% cited “personal fit/sales process” as the determining screening factor.1 Whether you currently specialize in sales of life insurance products or another area, you likely have clients that need help with their company’s 401(k) plan. If you focus on serving a particular type of client (e.g., doctors, women, etc.), you may have relationships with peer groups or professional service organizations that can lead to referral opportunities. Your personal fit with influential “retail” clients and associations can enhance your chances to successfully prospect in the 401(k) market. c. Participant Opportunities are Significant With the growth of participant-directed individual account plans, there has been an increasing recognition of the importance of delivering education to plan participants. Indeed, the Department of Labor (DOL) has identified at least five areas where financial professionals can make a difference: • Understanding the impact of fees on retirement savings; • Combating poor strategies when participants trade too frequently or at the wrong times; • Enhancing diversification; • Alignment of risk tolerance; and • Increasing tax benefits and savings.4 At the same time, many participants are still left to go it alone and do not have access to professional guidance. If you are capable of assisting with these basic concepts you can deliver valuable investment education to plan participants and help them with retirement income planning. In addition to helping participants understand how to maximize their benefits inside of the plan, you can also help participants who are leaving the plan. With record numbers of 401(k) participants set to exit the workforce over the next decade, there is an ongoing need for quality education as baby boomers begin to shift from accumulation to distribution strategies. 1 See Proposed Rule – “Insights on Closing the Sale,” available at 2 Cerulli Associates, titled “Evolution of the Retirement Investor 2012: Understanding 401(k) Participant Dynamics, and Trends in Rollover and Retirement Income.” 3 401(k) Rollovers A ‘Vast Opportunity’ For Financial Advisors; Financial Advisor Magazine, February 15, 2012. 4 Plan Sponsor Attitudes: Keys to Building Your Business, 2012 Plan Sponsor Survey, Fidelity Investments. ROLLOVERS CONTINUE TO OFFER OPPORTUNITIES Last year, defined contribution participants moved a record $315 billion into IRAs, and annual IRA rollovers are expected to surpass $450 billion by 2017.2 Nearly half of the plan participants who are planning to rollover money from 401(k) plans intend to work with a financial professional.3 By offering your services as a non- fiduciary to the plan, you can position yourself to capture IRA rollovers when participants retire or change jobs.
  4. 4. 4 For Producer/Broker use only. Not for use with the general public.866.390.7268 | 2. Myths vs. Realities: What Do You Need to Know? For too long, many financial professionals have avoided the 401(k) marketplace for one reason or another. Not only does this lead to lost opportunities, you may leave the door open to competitors and risk losing your clients to other financial professionals that are working with their employer. The following illustrates some of the common misperceptions associated with 401(k) plans and will help you determine whether you may be passing up opportunities for the wrong reasons. 401(k) Myths 401(k) Realities You have to be a specialist or an ERISA expert Service provider support allows you to offer turn-key retirement solutions to clients. Sales teams, relationship managers and TPAs will help you navigate the technical challenges and teach you what you need to know. There’s too much risk Avoiding ERISA fiduciary status and presenting the option of fiduciary support services from a third-party to the plan sponsor may limit your risk. Many financial professionals including registered reps, insurance brokers, and benefit brokers service 401(k) plans without acting as fiduciaries. My clients don’t need help and/or they are already working with another financial professional on the 401(k) plan. Many small business owners are currently underserved and the financial professional who originally sold the plan is not active. Only 54% of plan sponsors feel they get good value from their current financial professional.* The 401(k) plan represents a way to protect your client base deepen existing relationships by helping out clients who may have been ignored on the 401(k) side. 401(k)s are too much work While there are a number of procedures and activities that need to be performed, third-party service providers who contract directly with the plan sponsor can deliver most of the technical support. 3. Determining Your Role (Risks and Rewards) Revenue First, revenue is based upon the scope of the services you provide. Competitive pressures and breakpoints may limit your plan-level compensation; however, any asset-based fees will continue to grow given the systematic nature of salary deferrals and matching contributions that are made to the plan. Second, participant-level services provided in connection with assets held outside of the plan are subject to “retail” pricing schedules, and your revenue potential is determined by the number and size of those accounts. At the end of the day, your revenue potential is based upon the helping more participants save more for retirement. ASSESSING YOUR 401(k) PROFITABILITY Profitability = Revenue – Expenses • Revenue = (# of Plans X Size of Plans) + Ancillary Services (IRA Rollovers) * Source: Plan Sponsor Attitudes: Keys to Building Your Business, 2012 Plan Sponsor Survey, Fidelity Investments.)
  5. 5. 5 For Producer/Broker use only. Not for use with the general public. 866.390.7268 | 5 There are typically two ways that a financial professional may become an ERISA fiduciary: 1) by providing investment advice to the plan sponsor (e.g., helping nar- row the universe of funds to make available a limited number of designated investment alternatives (DIAs) to participants); and/or 2) by providing investment ad- vice to plan participants (e.g., providing ongoing, individualized recommendations to help a participant allocate among the plan’s DIAs). 6 See DOL Advisory Opinion 2005-23A. 7 For a detailed discussion, including examples, of what constitutes investment advice versus education, see DOL Interpretative Bulletin 96-1. Profitability is also based upon the nature of your services, and your status as a fiduciary, for example, may limit your ability to solicit IRA rollovers. The most common way for a financial professional to be considered a fiduciary is by providing individualized, ongoing “investment advice” that serves as the primary basis for investment decisions for the plan or its participants.5 You may engage in a prohibited transaction under ERISA if you are found: 1) to have used your fiduciary authority; 2) to cause a participant to take a distribution from the plan; and 3) invest the proceeds in a way that pays you more (than if than if the participant had stayed invested in the plan).6 If you plan to market IRA rollovers, you should avoid providing investment advice to plan sponsors and plan participants. You can do this by presenting the option of third-party fiduciary support services that are provided by professional registered investment advisers to a plan sponsor and/or the plan participants. You would then limit your services to retirement income planning and education. 7 Least Risk Proceed with Caution Most Risk Do you provide investment advice to the Plan Sponsor? No. Your role is limited to investment education, and the plan sponsor makes the decision to add or replace investment options under the plan. Yes. You provide investment advice to the Plan Sponsor or exercise discretion over the plan’s DIAs. Yes. You provide investment advice to the Plan Sponsor or exercise discretion over the plan’s DIAs. Do you provide investment advice to Plan Participants? No. Your role is limited to investment education, and the participants direct their own investments. No. Your role is limited to investment education, and the participant directs their own investments. Yes. You provide ongoing, individualized investment advice to Plan Participants. Expenses Expenses will be based upon your services and can be classified as direct or indirect. Direct costs to provide fiduciary services, for example, may include specialized training and tools necessary to deliver and document investment advice. You may also need to engage legal counsel to avoid prohibited transactions and purchase additional insurance when providing fiduciary services. Additionally, you’ll need to check with your broker/dealer to determine if you are allowed to act as an ERISA fiduciary. Indirect costs include your time (opportunity cost) and risk. Investment education, for example, can typically be provided in a group setting whereas investment advice requires you to meet with each participant individually and maintain detailed notes on the advice you provide. Fiduciary status also entails greater risks, and the costs associated with avoiding those risks can be significant. AVOID FIDUCIARY STATUS? While it may seem counter intuitive, you may be able to limit your risk, save time, and increase your business potential, by acting as a non-fiduciary. By presenting the right options to a plan sponsor, it is possible to deliver robust and effective retirement solutions without incurring many of the costs and risks personally. ASSESSING YOUR 401(K) EXPENSES Expenses = Direct + Indirect Costs • Direct Costs: = Specialized Training, Tools, Legal Fees, Etc. • Indirect Costs: = Time (Opportunity Cost) + Risk
  6. 6. 6 For Producer/Broker use only. Not for use with the general public.866.390.7268 | 4. Evaluating and Presenting The Resources of Service Providers a. Finding the Right Products and Services A successful strategy in the 401(k) marketplace will require you to identify products and services that fit your objectives and satisfy the needs of your clients. The foundational services that are generally required to run a 401(k) plan are trust and custody and recordkeeping and administration. In an “open architecture” plan, these components are assembled piecemeal, and plan sponsors will expect you to help select, monitor and replace the individual service providers. While this approach may provide greater flexibility in terms of investment options and plan design, the indirect costs for the financial professional are higher — particularly when relationship management and enrollment support are not included. Additionally, there is a greater risk you will be deemed a fiduciary absent any third-party fiduciary support service. If you are new to the business, you should consider working with a retirement solution that is offered on a “bundled” or “unbundled” basis. The distinction is based upon whether administration services (e.g., regulatory compliance, non- discrimination testing, etc.) are provided by the entity that is the issuing the funding vehicle for the plan or provided by an independent third-party administrator (TPA). Understanding Service Provider Products and Services It’s important to understand how different retirement solutions will affect your business model. Understanding Service Provider Products Services Plan Sponsor Need Product Service Solutions Financial Professional Business Considerations Investment Options Open Architecture “Smart” Architecture (investment selection is narrowed at product level) Time and Risk? TPA Bundled Unbundled Flexibility? Fiduciary Support Services No/Limited Fiduciary Support Robust Fiduciary Support Services Risk to Plan Sponsor and Financial Professional? b. Evaluating Fiduciary Support Because the definition of a fiduciary under ERISA is determined based on the functional role that an individual has to the plan, fiduciary status may be triggered inadvertently and apply irrespective of your title or any disclaimers you may provide. The best way to avoid being considered a fiduciary is to work TPAs CAN HELP While there are some cost-savings and synergies associated with a bundled plan, you should be careful not to overlook the value of a knowledgeable, local TPA. Often times, the TPA will be able to provide critical “boots-on- the-ground” assistance to you and your clients on the more technical aspects of plan administration.
  7. 7. 7 For Producer/Broker use only. Not for use with the general public. 866.390.7268 | with a provider that offers third-party fiduciary support services at the plan- and participant-level. If a plan sponsor uses the services, you will be less likely to be considered an investment advisor and thus a fiduciary to the plan. If you desire to avoid being considered an ERISA fiduciary, it is important to ensure that: 1. the registered investment advisor/investment manager acknowledges its fiduciary status to your clients in writing (many providers offer fiduciary warranties or other investment-related support to plan sponsors that may be beneficial in some respects, but they don’t proactively shift the fiduciary risk away from you and your clients); and 2. the services are likely to be utilized (if fiduciary support is offered but not utilized, your clients may look to you to provide investment advice). Meeting Your Goals and Your (Clients') Needs Your Goal/Need/ Preference Plan Sponsor’s Goal/ Need/Preference Solution You enjoy working with participants and helping them understand and reach their retirement goals. Help participants understand their benefits and how to become ready for retirement. Provide education to plan participants, leverage educational tools, relationship management and fiduciary support services offered by third party registered investment advisers. You wish to continue to work with participants after they leave the plan (e.g., rollovers, retirement income planning, etc.). Participants need ongoing information and assistance. Provide education, as above, and do not offer investment advice to the plan or plan participants. You are not qualified to answer questions about technical administrative issues. Plan Sponsors want to work with someone who is local. Choose from a national network of independent TPAs. You are not and do not wish to be Series 65 or 66 licensed, and you don’t want another financial professional advising your clients about the plan’s investment options. Plan Sponsor wants help selecting and monitoring the plan’s investment options. Suggest the option of fiduciary support services that are provided by third party registered investment advisers. You want to limit your participant-focused services and avoid fiduciary status. Participants need help allocating and rebalancing their accounts. Suggest the option of managed account services provided by third party registered investment advisers Summary While it is true that there are a number of activities that must be performed to run a successful plan, a good financial professional knows how to identify products and service providers that will help deliver the majority of day-to-day services without direct involvement of the financial professional. Tools and resources available from these service providers may provide additional scale for servicing plan sponsors and participants. ACCESS TO TOOLS AND RESOURCES Products that provide you and your clients with valuable tools and resources can go a long way in helping you deliver your services while keeping your direct and indirect costs at a minimum. When selecting a service provider, you should consider the following:  Fiduciary support services at plan and participant level  Available network of TPAs in your area  Employee education and enrollment support  Dedicated customer service and support  Fee disclosure and technical support  A diversified line-up of investment options  Sales and proposal support  Plan implementation assistance and relationship management support
  8. 8. The Guardian Insurance Annuity Company, Inc. 7 Hanover Square New York, NY 10004-4025 ® For Producer/Broker-Dealer Use Only. The Guardian Choice® group variable funding agreement and The Guardian Advantage® group variable annuity contract are issued by The Guardian Insurance Annuity Company, Inc. (GIAC), a Delaware corporation whose principal place of business is 7 Hanover Square, New York, NY 10004. GIAC is a wholly owned subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Guardian does not issue the The Guardian Choice® and the The Guardian Advantage® and does not guarantee the benefits they provide. Guardian Retirement Solutions™ refers to the administrative support services, including participant recordkeeping as well as marketing, enrollment and educational materials, provided by GIAC in conjunction with the individual and group retirement products issued by GIAC. The Pension Resource Institute is not an affiliate or subsidiary of The Guardian Life Insurance Company of America (Guardian) or The Guardian Insurance Annuity Company, Inc. (GIAC). Contact Your Sales Team Today Call: 866.390.7268 (option #2) Email: 401(k) Visit: It’s About YOU At Guardian Retirement SolutionsTM it’s about you. We are dedicated to helping financial professionals succeed in the retirement plan marketplace. Work with a trusted company that provides you the freedom and control to do what’s right for your clients and your business. Work with Guardian Retirement SolutionsTM and you can: 3. Deliver Flexible and Customized Solutions to your clients 4. Rely on World-Class Service and Support for you and your clients 2. Grow and Differentiate Your Business 1. Benefit from a Customer-Focused Approach to Retirement 5. Gain from Guardian’s more than 150-year Heritage of Promises Kept GP016737 (05/13) 2013—5310