Editor’s note: Jeff Briskin is a columnist for Rethinking65. Read more of his articles here.
One of the toughest markets for investment advisers to crack are 401(k) plans.
This may seem counterintuitive, because retirement plan sponsors are required by ERISA to apply a predetermined set of fiduciary requirements when evaluating and selecting investment options to include in the plan.
Most plan sponsors don’t have the knowledge to do this themselves. So, they either hire an independent investment advisor to take on this responsibility as an ERISA 3(21) or 3(28) fiduciary or rely on a financial professional affiliated with the plan’s payroll company, third-party administrator or recordkeeper.
Once these professionals become embedded in the plan, it’s incredibly difficult for outside advisors to dislodge them.
After all, plan sponsors reason, what makes one advisor better at choosing mutual funds than another? As long as the advisor can certify that their fund recommendations meet ERISA’s standards of diversification, suitability and cost-efficiency — and delivers quality service at reasonable fees — there’s no real urgency to switch.
But over the coming years, there may be one opportunity for investment advisers to get an inroad into the 401(k) market: As a resource for evaluating annuity products employers are considering adding to their plans.
The Next Big 401(k) ‘Thing’
Ever since the SECURE Act made it easier for 401(k) plan sponsors to add annuities and other so-called lifetime income products to their plans, there’s been a huge amount of press generated in recent years about these options.
It isn’t that plan sponsors don’t want them. It’s that, unlike mutual funds, very few financial professionals really understand how these extremely complex products work, let alone have the expertise to figure out which options are appropriate for inclusion in a plan.
There are plenty of third-party tools plan sponsors and investment advisers can use to evaluate and select mutual funds. No such tools currently exist for annuities.
So, at the moment, employers who want to offer annuities have to rely on the recommendations of their recordkeepers or life insurance salespeople, few of whom are held to the ERISA fiduciary standard. As long as their recommendations meet the vaguely defined notion of “suitability,” they can favor those products offer them the highest commissions.
It’s then up to the plan sponsor to determine whether the recommended products pass the ERISA fiduciary test.
The Opportunity for Investment Advisors
Plan sponsors who are looking for objective, conflict-free advice on annuities really only have one choice: to work with an outside annuity consultant who is paid solely by the plan to conduct this due diligence.
And who better to take on this role than independent investment advisors who educate themselves to become qualified annuity experts?
Think about the services they can offer. They’ll be able to:
Determine which specific kinds of annuities make sense for a given plan, based on the demographics and general retirement income needs of plan participants.
Create comparative matrices of different annuity options in terms of payout rates, features, optional riders, fees and surrender charges.
Evaluate the financial stability of the insurance companies offering these annuities.
Provide educational resources to help plan participants understand how annuities work and their potential benefits and risks.
Deliver one-on-one consulting with plan participants to help them figure out whether spending a portion of their 401(k) assets to purchase an annuity makes sense, and whether there may be better alternatives, given their retirement income objectives.
Give participants who are set on purchasing annuities the education they need to make an appropriate product choice with payouts and other features that align with their lifetime income needs.
These annuity advisors won’t necessarily replace a plan’s current investment adviser, who will continue to provide guidance on the plan’s investment options. They’ll simply be an added resource.
One advantage investment advisors will have in this role is fee flexibility and transparency. Since they’re not tied into an AUM-based fee model, they can charge an hourly fee, retainer fee, or fixed project fee depending on the services they provide.
Credibility is Key
Compared to life insurance agents, investment advisers will be more trustworthy resources since they won’t be selling annuity products, just evaluating them.
However, to build credibility, they’ll need to demonstrate that they know as much about annuities as the life insurance salespeople they’ll be competing with.
There are a number of industry-recognized annuity certification programs available. Many of them require applicants to be insurance salespeople or brokers. One of the few that apparently doesn’t is the Certified Annuity Specialist® designation offered by the Institute of Business and Finance. I’m not personally familiar with this program or its curriculum, so this shouldn’t be taken as a recommendation, but as a possible option for further consideration.
Other Benefits
It will take a great deal of time and effort for investment advisors to gain the knowledge they need to become qualified annuity consultants and create business development and marketing plans targeting 401(k) plan sponsors.
But once they’re able to crack this market, they may reap additional benefits by building relationships of trust with business owners and plan participants. Those who initially seek advice on annuities may later seek them out as financial planners and investment advisors.
And that’s where this investment may will pay off.
Jeffrey Briskin is director of marketing at a Boston-area financial planning firm and the principal of Briskin Consulting, which provides content and digital marketing services for asset managers, TAMPs, trust companies, and fintech firms.
