The Best Path Forward

Advisers who specialize in the micro retirement plan market—i.e., in plans with $10 million or less in assets under advisement (AUA)—say that fee compression has made it more imperative than ever that they grow by expanding the number of clients they serve and their AUA.

Steve Ulian, head of institutional sales and relationship management for Bank of America Merrill Lynch in New York City, calls this strategy “critical. It is becoming increasingly hard to make money given the fee pressures” and the growing demands of sponsors—including those on the low end of the market, he notes.

When advisers who specialize in the micro-plan market are asked whether they would prefer to grow their business by taking on more clients or moving upmarket, many say they want to remain focused on smaller plans because of the close relationships they have with their clients, the lighter competition they encounter and the greater impact they can have on smaller vs. larger plans.

In fact, the 2016 PLANSPONSOR Defined Contribution (DC) Survey found that only 60.7% of plans with $5 million to $10 million in AUA have an adviser, compared with 78.9%% of plans with $50 million to $100 million—meaning there is significant opportunity for skilled advisers to win new business without competing against each other.

It may make sense for an adviser focused on micro plans to move upmarket if he is a registered investment adviser (RIA) and works alone rather than being part of a team that supplies deep investment, educational and communication support to bring to the client, Ulian says. “If you are unable to scale that across many plans, you may be better off having fewer plans with greater assets,” he says.

But adviser sources for this story who focus on micro plans prefer to remain in that space. “It’s a better customer,” says Jim Sampson, director of retirement advisory services at Hilb Group Retirement Services in Warwick, Rhode Island. “You actually have a relationship because you are dealing with the owner or owners of a small private business as opposed to boards or committees that turn over every three years. It makes for a longer-term client, and there is not as much competition for the business.”

“Plans with $3 million to $50 million in assets don’t have staff dedicated to the retirement plan, need a lot of help, and are willing to pay for that service,” agrees Vincent Morris, president of Bukaty Companies Financial Services in Overland Park, Kansas. “Once you go bigger than that, it becomes very competitive,” with many people vying for the business.

Moreover, it cannot be overlooked that 98% of businesses in this country are small businesses, says Tom Foster, national spokesperson with MassMutual Retirement Services in Enfield, Connecticut. “There is much more opportunity” for retirement plan advisers willing to work with smaller plans and companies.

Tyler Harrison, managing member of Efficient Plan in Denton, Texas, argues that margins are higher when serving smaller plans. Additionally, he says, if he had larger clients, such as a $50 million or a $100 million plan and were to lose their business, his bottom line would be more drastically affected. “I would rather have 10 $1 million plans than one $10 million plan,” he says.

Advisers can also make more of a difference for smaller plans, Sampson says. Traditionally, “the folks servicing these plans, many of them brokers, are typically doing nothing for them because they are not focused on 401(k)s,” he says. “I bring high-touch fiduciary services you would generally get at a larger company. We see that as a very large competitive advantage.”

Indeed, advisers who specialize in micro plans say the Department of Labor (DOL) fiduciary rule is creating tremendous opportunities for retirement plan advisers, and particularly those working with small plans, which most likely have no 3(21) or 3(38) fiduciary services.

Harrison says he has recently turned his attention to offering sponsors his fiduciary consulting services—preferably his 3(38) services—and that many of these projects turn into ongoing advisory business. “This is another value-add that I can offer, because micro-market plan sponsors aren’t aware this is available,” he says.

Jim O’Shaughnessy, managing partner and co-founder of Sheridan Road in Northbook, Illinois, says he is working with a select number of recordkeepers to create a bundled solution that includes 3(38) services, for his smaller clients. Currently, only 5% of these clients use this service, but he expects it to grow to 10% in the next six months and to 35% within two years. Among new micro-plan clients, 50% are coming on board for 3(38) services, which O’Shaughnessy attributes to growing awareness among plan sponsors.

“With this DOL regulation now taking hold, the number of plan sponsors looking to hire an adviser for the first time or that are looking for a fiduciary adviser and reach out to us has dramatically increased,” O’Shaughnessy says. As a result, Sheridan Road expects its current base of 300 clients to expand to 500 by 2019.

Other Avenues for Growth
Other ways retirement plan advisers focused on the micro market are looking to grow their business include creating efficiencies in order to increase scale. “To create efficiencies, we are creating bundled solutions and leveraging technology,” O’Shaughnessy says.

“There are hundreds of service providers that serve the micro space, as opposed to only a handful that serve larger plans,” he says. “We go to the smaller employers, tell them what they need and make specific recommendations on who they should work with and how they should design their plan. What we can now do for a $1 million plan is what we could only do for a $10 million plan three years ago.”

It is also important to educate existing clients on all of the services your advisory group offers, including fiduciary services and financial wellness, he says.

Bank of America Merrill Lynch is finding financial wellness programs in demand with sponsors of micro plans, says Ulian. “With the unemployment rate at 4.3%, companies are looking for ways to differentiate themselves, and one is through financial wellness programs,” he says. “That is a sea change happening not just among mega plans but down-market, even at a $5 million plan.”

Jamie Greenleaf, principal and lead consultant at Cafaro Greenleaf in Red Bank, New Jersey, says she now offers financial wellness programs to her clients, who find that these help retain employees longer.

Advisers focused on micro plans also discover that offering other services, such as third-party administration (TPA), Certified Public Accountant (CPA) and actuarial services, or advice on health care, can bring in new business.

Steve Fraidstern, vice president at Associated Financial Consultants Inc. in Fort Lauderdale, Florida, says the CPA and actuarial skill-sets work particularly well in the micro space. “Small business owners often have cash balance plans or profit sharing and want help on their tax considerations,” he says.

Likewise, Bukaty Companies Financial Services is part of a larger organization that has property, casualty and payroll divisions, which provide leads to the retirement plan advisory group, Morris says.

Some  micro-plan advisers are also actively marketing and creating thought leadership centers. Obtaining plan sponsor contact information from recordkeepers and other service providers, Fiduciary Plan Advisors, in Baltimore, conducts quarterly marketing campaigns centered on hot topics of the day, says Jania Stout, practice leader and co-founder of the firm. “When the lawsuits started coming out in the higher education space, we knew that sponsors were keenly aware of this, and we built a marketing campaign around it via emails and webinars,” she says. “Our goal is to gain one to two clients every campaign.” The cost of renting the names is $10,000 a year.

Cafaro Greenleaf executives also attend networking groups and conferences to give speeches and gather leads, Greenleaf says. And, like advisers in other markets, those in this one are looking to leverage leads from recordkeepers, mutual fund wholesalers, attorneys, CPAs, payroll companies and business brokers. These advisers say the micro market is very active and that it continues to provide endless opportunities.

Key Takeaways

• Micro-plan advisers typically want to stay in that space because of its many upsides, including less competition and better client retention.
  
  
• The fiduciary rule may prompt many micro-plan sponsors to seek out an adviser for the first time or an adviser that offers fiduciary services.
  
  
• Micro-plan advisers can grow by creating efficiencies via bundled solutions and technology, among many other possible strategies.