Working Down-Market

As a plan adviser based in tech hotbed Austin, Texas, Aaron Pottichen spends considerable time working with micro plans. “It’s a space not many advisers fish in,” says Pottichen, president of retirement services at CLS Partners. “And here in Austin, there are many startup companies, so that’s a lot of the opportunity we have in this market.”

Sixty-nine percent of micro plan sponsors—those with under $5 million in assets—utilize an adviser, according to the 2018 PLANADVISER Micro Plan Survey. For advisers interested in cultivating that space, there are several key ways to make it work.

Service Focus Areas

When asked what services micro plans most want and need, Pottichen, and other experts, mention the following:

Help with understanding their fiduciary role. “On the plan sponsor side, there is really a lack of know-how about proper procedures and documentation,” Pottichen says. CLS Partners often collaborates with someone on an employer’s staff who has never worked on a 401(k) plan, so the firm spends time educating those newcomers. “We tell them, ‘We’ll help you understand all the big, bad terms. One year from now, you’re going to be so much better educated on all the key aspects of this plan,’” he says.

Plan-design insight. Just 54% of plans that responded to the Micro Plan Survey are provided with plan-design benchmarking by an adviser, for example. “In this space, they’re not getting much attention, from a plan-design standpoint,” says adviser Russell Warye, president of Benefit Partners Financial Group LLC in Libertyville, Illinois.

“For some of our family-owned business clients, we are working on creative ways to maximize the contributions for family members and other highly compensated employees [HCEs]. So we’re looking at plan designs such as cash balance and defined benefit [DB plans],” Warye says. “For other companies that are having trouble passing nondiscrimination testing and that maybe aren’t providing much of a match now, we are talking about automatic enrollment and auto-escalation, and even about doing a stretch match to give participants the incentive to save more.”

Help resolving routine operational questions. Many companies with micro plans have no one on staff dedicated solely to working on the retirement plan, says Warye, whose firm serves a range of plan sizes. “We encourage our clients to call us any day, about anything,” he says. “We may get those types of problem-solving calls once a month from a plan sponsor, and we are happy to help.”

Oftentimes with micro plans, CoSource Financial Group LLC serves as the intermediary between the plan sponsor and its third-party administrator (TPA), says Beau Beaullieu, partner at the advisory firm, in Lafayette, Louisiana. “The TPAs tend to talk in technical terms, so we translate that to the sponsors in layman’s terms,” he says. “The sponsors really appreciate that.”

Personalized participant education. Sixty-nine percent of this year’s Micro Plan Survey respondents provide one-on-one participant education via an adviser. “We find that, the smaller the client, the more participant service it’s looking for,” says adviser Patterson McKinlay, principal at Achieve Retirement in Denver. Many sponsors that do not offer a match go this route, he says. “If we do one-on-one meetings and give participants [retirement savings] gap reports, the cost of that to the employers is significantly less than the cost of a robust match,” he says.

Fee Approaches

Why have some plan advisers hesitated to work with micro plans? “There’s not a lot of dollars from an asset standpoint, and our business is traditionally run on the basis of assets under management [AUM],” Beaullieu says. “So the smaller the plan size, traditionally, the smaller the revenue.”

Because of the low asset base and the intense work often required, especially during the first year, CLS Partners charges a flat fee to new micro-plan clients. “It helps to ensure that I can continue to run the business at a profit,” Pottichen says. “Then, once a plan gets to a certain asset level, we’ll change from a flat fee to an asset-based [variable] fee.”

For a startup plan—and especially if the employer has no match—CLS recommends that the employer pay the recordkeeping and advisory fees, Pottichen says. So, the participants pick up only the investment fees. “If employers don’t, we tell them, ‘You’re sticking your employees in a plan with what amounts to a 2% annual fee,’” he says. “We show the employer, ‘Here’s the difference that will make in the participants’ account balances over time.’”

Most of Achieve Retirement’s micro-plan clients utilize an asset-based advisory fee that participants pay, McKinlay says. But he has started to see more clients adopting an employer-paid flat fee. “It comes down to educating the client. Once you speak to the owners of the company about this, they realize, ‘We have our assets in the plan, and we have the largest amount of assets, so we’re paying the highest asset-based fees. Why not have the company pick the advisory fee up as a business expense instead?’” he says. “Once they realize that doing that will allow all participants to accumulate more assets over time, it’s a no-brainer.”

Keeping it Profitable

Asked about how to keep these client relationships profitable, sources most often referred to a couple of strategies:

First, clearly spell out the service parameters upfront. For Benefit Partners’ micro-plan clients, Warye says, that typically includes main elements such as one annual meeting with the sponsor for a plan review and fund-performance review, one annual on-site day for participant education, and quarterly investment reports aligned with a plan’s investment policy statement (IPS).

“It has to be a frank conversation with the plan sponsor, and the expectations have to be set really clearly,” says Beaullieu. If his firm has issues with unexpected demands on its time after that, he says, those rarely come from sponsors. “The demand comes from employees who are in need of additional information, so we work hard to get them that information,” he says.

Second, make on-site time very productive. “We keep the group education meetings short and sweet, maybe 20 minutes,” McKinlay says. “And then we’ll do one-on-one participant meetings. But we tell participants, ‘Don’t come to the meeting just to set up your password and user name for your participant account.’” Achieve Retirement finds it more effective to spend that time talking about crucial issues such as deferral rates and investment selections.

“While we’re on-site, we try to be as efficient as possible,” Beaullieu says. “We knock out as many things as we can. Very often in a day, we do a plan review with the sponsor, then a group employee meeting and then one-on-one employee meetings.”

Art by Paige Mehrer