Moving Out
You cannot blame Mark Wayne for a small bit of bragging: Freedom One Financial Group, the advisory firm where Wayne is President and CEO, boasts a 70% conversion rate of terminated participants rolling into an individual retirement account (IRA) through his firm—a segment he says translates into about $50 million in gross revenues annually. “It’s something we’re proud of and have been working at for years,” says Wayne.
It also should not be a surprise that rollovers are now front and center on the minds of many financial advisers who recognize the segment can help boost their asset base in general and be a potentially lucrative pipeline of high-net-worth clients looking for financial hand-holding as they leave their workplace plan.
After all, the “ka-ching” sounds as assets move from qualified plans to IRAs is loud now and only expected to get louder: A recent Cerulli Associates report estimates that rollovers from 401(k), 403(b), and 457 plans will represent almost $1.9 trillion of IRA asset flows by 2013.
A word of caution, though, before financial advisers rush to open a second bank account. Advisers and rollover solution providers say plan sponsors—who represent the “gatekeeper” between advisers and the participants—do not want to have anything to do with service providers only out to steal away those with the highest balances for special treatment, leaving the participants with lower balances to their own rollover devices.
“Plan sponsors are concerned that there’s not a lot of high-net-worth cherry-picking going on and that everyone gets a qualified [adviser],” says Jim Langenwalter, Chief Marketing Officer at RolloverSystems, a provider that funnels all of its rollover business through advisers.
“A plan sponsor doesn’t want the adviser to skim the cream off the top and leave the rest of the participants on their own,” agrees Jacqueline Rynn, Vice President of Marketing and Product Development at Wealth Management Systems Inc. (WMSI), another rollover solutions provider.
That is why an adviser’s approach to a plan sponsor currently without a formal rollover solution—either a new or a current plan advisory client—cannot be handled clumsily.
“Unfortunately, I think there are a lot of [advisers] that are in [the retirement plan space] more for the HNWs first and the 401(k)s second,” admits adviser James Sampson, with NRP Financial in Boston, Massachusetts. “That’s bad because it makes it tougher for us [broad-based advisers] to work the issue to say, “No, we care about all the people, not just those at the top.””
Rather, industry experts say, plan sponsors considering a rollover solution want advisers and rollover solution vendors who can offer three primary things: They want a willingness to acknowledge a responsibility to deal with all participants, regardless of asset level; a high-touch service model that offers a painless and rapid process with assets left out of the market for as short a time as possible; and a marketplace of potential IRA providers so neither the sponsor nor the rollover solution vendor has to recommend particular IRA companies (and assume the liability for that recommendation).
Advisers may have competing motivations for helping to set up rollover solutions or a rollover program at their clients’ plans. They want to help participants have enough money in retirement, but they do not deny also being driven at least in part by basic business interests.
If put in place carefully with the cooperation of a client plan sponsor, advisers say a robust rollover business can act as a “bridge” between the two halves of many advisers’ business—qualified plan advisory services and individual wealth management. Sampson says that, if his firm did not proactively put in a rollover process, “the vendor might take the ball and run with it”—without paying the adviser.
For advisers who do not have the ability to handle rollovers in-house, solutions from RolloverSystems and WMSI can help facilitate the process. The rollover provider has electronic ties to various recordkeeping platforms—that allows the distribution event, such as a termination distribution, to be flagged and subsequently checked against criteria established by the adviser, or provider in a direct processing environment. At the point of distribution, that flag triggers an alert from the rollover provider to the adviser, so that the adviser can reach out to the participants and consult with them about their rollover options.
“That’s a huge reason to have a system in place because usually the [adviser] is the last to know when a person leaves the company,” says Sampson.
Even if they can set up a notification system, the story does not end there. Advisers then have to be able to keep track of the incoming stream of alerts about employee departures and, more importantly, be able to respond quickly and effectively.
The rollover provider also has electronic linkages to various IRA providers that can facilitate a seamless transfer to a retail account when an adviser is not involved, or when the account balance is too small to require the adviser’s engagement.
If the departing participant is below the adviser’s pre-set asset threshold, the solution has to provide services to that person in a cost-effective way. If the participant’s plan assets meet the minimums, the high-touch service level goes way up.
“You have to be geared up to respond when you’re notified, which is easier said than done,” admits adviser Jamie Worrell of GPS Investment Advisers of Providence, Rhode Island.
In terms of process, once the plan sponsor agrees to add the rollover solution, the rollover provider typically will begin working immediately with the plan’s recordkeeper/TPA to set up the requisite data flow about the departing participants and send out initial educational literature focusing on the advantages of keeping one’s plan balance tax-advantaged. From that point, a participant’s alternatives include a complete plan-to-IRA asset transfer, a partial distribution/partial rollover, staying in the plan if the balance is more than $5,000, or rolling over to a new qualified plan. The provider typically makes its money from fees paid by IRA providers when a participant buys an IRA.
At a big operation such as Wayne’s Freedom One, the company does its own data processing. For example, when a participant at a client plan leaves, part of the HR outsourcing is a Freedom One rollover form. The resulting data from that form is dumped into Freedom One’s system on Fridays and generates a follow-up phone call to the recipient early the following week. By using a static list of investment options and going after the volume of business, Wayne said Freedom One’s business model even makes sense for relatively small-balance accounts.
“They don’t have the same level of service expectations,” Wayne said. “If you have 500 people like this in the $30,000 or $50,000 range, then it’s highly efficient.”
Regardless of how it is set up, the advisers and providers say that there are significant plan benefits to implementing a solution by which participant balances are moved out of a plan. These benefits can be described to the plan sponsor as early as the initial sales presentation, or as part of the ongoing dialogue with a plan sponsor client.
Two of the most common issues such a solution addresses are those of plan cost and retirement readiness.
Plan cost: Citing a statistic that an average 30% of participants are terminated employees, RSI’s Langenwalter said plan administrative costs could be trimmed by that much by an adviser helping to move those people off the plan’s rolls via rollovers. Sure, Langenwalter admits, it can be advantageous from an economies-of-scale standpoint to have the assets in the plan. However, generally the lion’s share of employees rolling over have relatively small balances, so moving them off the books should not hurt in that regard, he contends. Besides, he says, moving these participants off the books could boost a plan’s average-balance numbers, which, in itself, can help boost its economies of scale.
Increasing retirement readiness: “[Advisers] see the rollovers as the number one way to keep people from cashing out of the system,” says Sampson.
Through its employee education materials and through employee contacts with its representatives, such as through a call center, a rollover solution provider can help advisers institutionalize an all-important piece of participant education—keeping one’s retirement nest egg tax-deferred for as long as possible.
Whichever route an adviser chooses, whether in-house like FreedomOne, or outsourcing like Bostonian Solutions, convincing the plan sponsor to get on board is a first step.
Illustration by Chris Buzelli