Servicing Micro Plans
No doubt related to these disparities, the 2016 PLANADVISER Micro Plan Survey shows just 65.9% of plan sponsors in this asset range say they are aware of their need for guidance and are turning to advisers for help.
A skilled defined contribution adviser can surely imagine ways to adapt his services for this dynamic market. However, some retirement plan advisers shy away from embracing the market because of concerns about profitability and micro-plan-sponsor willingness to embrace plan design elements and governance best practices. According to Benjamin Lewis, senior managing director, direct plan market, at TIAA in Boston, metrics such as those just stated show that plans with less than $20 million in assets are a ripe segment for advisers looking to add new clients.
“That is really what we see as the ceiling of the micro market,” Lewis says. “I know that some people in the industry may view that as too high to be considered a ‘micro’ plan, but we see some compelling evidence that this is the milestone under which many plans are still run by HR [human resources] generalists. These plan sponsors are also probably acting as the CFO [chief financial officer], the head human resources officer, the head of risk assessment and risk management, head of insurance and payroll, etc. They’ve got a lot of responsibilities.”
Being so strapped for time, these sponsors may have failed to equip their plans with the latest and greatest features. Therefore, Lewis explains, the key to advisers gaining business in the micro-plan market is “bringing efficiency not just for your own business processes but also for the buyer and its own day-to-day work. First and foremost, these small-business clients want the adviser to provide implicity and efficiency.”
Lewis observes that the micro market segment offers the largest opportunity when it comes to the sheer number of plans that advisers could serve. There are so many micro plans out there that still have no adviser, or never had one, and competition is so, relatively, sparse, that the market naturally presents itself as a compelling prospect.“If you take plans in our base of potential clients with more than 100 participants, only about a quarter of them are working with an adviser today,” he notes. “If you look further down at plans with more than 50 participants, it’s only about 15% engagement overall with an adviser. This is for the nonprofit space, keep in mind, but the corporate figures are very similar, from what we have measured.” All told, Lewis says, the opportunity “on the smaller end of the market is simply huge.”
Jason Roper, divisional vice president for MassMutual Retirement Services in Tallahassee, Florida, agrees that the sheer volume of small plans is incredible, whether corporate or nonprofit. “Over 650,000 individual DC plans exist right now in the U.S., and a vast majority of them are micro plans,” he says. “Especially when we drill down to under $10 million or under $5 million [in plan size], there is incredible opportunity here, both to help people and to help your own business. It’s a win-win from that perspective.”
But what services will advisers actually be selling today in the micro market? And, maybe even more importantly, can such services actually be profitable when the clients are so small?
“In terms of the service model, as we go down into the micro market, you can think of Maslow’s Hierarchy [of Needs],” Lewis says. “They want food, shelter and water. They want the basics. They want the plan to run smoothly without requiring a ton of daily work on their end. All the micro-plan sponsors in the micro market would be happy to reduce their effort and risk as much as possible. The big constraint is the pricing and the fact that the smallest plans do not have many extra resources to go around.”
Unlike in the larger market where the potentially sizable cost of running advanced plan analyses or providing other high-touch services can be spread across large groups of people, any such work for a small plan will be charged only to a small number of workers. Jennifer McPhearson Frantom, vice president, alliance business at ADP Retirement Services, in Monroe, Louisiana says it is quite straightforward—the calculation about profitability and efficiency that inevitably defines the scope and shape of services delivered to micro-plan and large-plan clients alike.
“While it’s true in the large market that you have to be smart about how you align your staff and resources to work very efficiently, in the small market you have to be even smarter,” she observes. “You have to be able to optimize vendor outsourcing for clients.”She adds that they see many “one-and-done advisers [with] only a small handful of plans, indicating that a good chance exists that the quality of service could be significantly improved by a truly professional DC adviser.
“The real specialist adviser will be able to come in and blow these plan sponsors away with the increased quality of service,” she says. “You can show them what real service for a plan can look like, even if it may be a little more expensive than what they’re used to paying, and, in turn, you may be surprised by clients’ willingness to pay a little more to you, as a new provider, for truly great service.”
Like in the larger market, some micro-plan sponsors will naturally want to take the extra step of being paternalistic and providing a true retirement readiness benefit, and so they will perhaps also seek out direct, one-on-one advice and support for participants, the experts say.
“I would say that 90% of the consult-ing that advisers do in the space will be centered around the investment options and providing general participant education. That’s something that’s a little different from the large market, where you see more of the high-level fiduciary plan design work, for example. But that kind of work also occurs in the micro market,” Roper says. “According to our own research, about another 50% to 60% of the time, advisers to micro plans are also doing fee assessments and plan design, as well as ongoing compliance service monitoring that resembles the core services advisers provide upmarket.”
Still, all three experts stress the importance of grasping upfront what it means, in terms of fees and profitability, to work in the micro market.
“It’s important to understand that, as you go down-market, the revenue you are going to receive from a given client will be much more limited, and so, necessarily, there will have to be some restraints on the time you can spend servicing said client,” McPhearson warns.
“There will necessarily be more standardization of service, and this can be a challenge for an adviser who is more used to the highly customizable services that are possible in the large and mega market,” she adds.
Conversions, Pricing and Other Considerations
“The first step in overcoming pricing challenges in the
micro market is simply being comfortable and confident about what your services
are and what your pricing is,” says Jason Roper of MassMutual Retirement
Services. “Just like in the mega market, it is critical to be able to clearly
state what your services are and how fees are being assessed—and not only that,
but to show that a strong value is being delivered for the fee.”
Also, just like in the mega market, the lowest price is not
necessarily the best price, Roper says. “In fact, in the small market this is
particularly true, given everything we know about the challenges of servicing
small plans.”
The second part, he says, is “being able to do everything
efficiently, so you can bring in affordable pricing.”
“This will probably require you to be selective about the
recordkeepers you can use, so that you can rely on the scalable client support
service they might provide,” Roper says. “The most successful advisers don’t
work with 20 or 30 providers. They have maybe four or five distinct service
models that all have very well-defined strengths and characteristics—and a few
key partners where you can fully leverage their services to deliver a full
suite at a fair fee.”
Important to observe is that, according to the 2016
PLANADVISER Micro Survey, sponsors and employers in the micro market pay all of
the costs of recordkeeping and administration directly 47.1% of the time; that
preponderance increases to 59.2% for plans with $1 million or less in assets.
This may ease concerns about upping participant fees, especially when the plan
sponsor feels paternalistic about the plan.
Of course, frequently when advisers take on these small
companies, the CEO is also the chief financial officer (CFO) and maybe the
human resources (HR)director, too. “So, going through a recordkeeping
conversion right away is not exactly something he wants to do or to pay for,”
Roper advises. “No doubt, this is a challenge, and it will continue to be a
challenge. But you also have to be candid and confident with your clients. If
you have great relationships with very capable providers and you genuinely
believe a client would be better served by another provider, then you should
have no problem advocating for that conversion. If your providers are as good
as you say they are, it should not be an overly burdensome process for the
client to convert, and it should pay dividends in the end.”
Roper’s last pricing tip for the small market is that, when
a client perhaps cannot practically convert recordkeepers immediately, “you can
also really push the existing vendors to make [the current relationship] work
for everyone. You can push them for better standardized reporting and more
responsive client service, for example, so they can support you and the client
effectively and efficiently.”
Key Takeaways
- With so few being served by retirement plan specialist advisers, micro plans can offer tremendous opportunities.
- But advisers accustomed to charging more for high-touch and customized large-plan service deliverables may need to realign staff and resources efficiently to be profitable.
- The market offers advisers an opportunity to create standardized services and to leverage trusted recordkeepers, third-party administrators (TPAs) and other vendors to maximize return on clients’ benefit spend.