Wirehouses find a way through 401(k) regulation

Expect wirehouses to step up their 401(k) game in a bid for more retirement plan business. Stronger regulations from the Labor Department over the last three years have been calling for a more visible demarcation among financial advisers, distinguishing those who are nonfiduciary brokers with a handful of retirement plan clients from those who act as fiduciaries and base the lion’s share of their book on 401(k)s.

You can point to the DOL’s 408(b)(2) fee disclosure regulation, which went into effect last year, as the pivotal development that will now require brokers, advisers and other service providers to spell out not just the services they render and their cost but whether they are acting as a fiduciary to the plan.

Many expected wirehouses to be down for the count after those regulations, since their reps — employees of the firms — would appear to owe their first duty to their employer, and not the 401(k) clients. However, wirehouses have taken to segmenting their field force, appointing a handful of specialist advisers to provide fiduciary advice, provided they meet training requirements and asset levels.

(More: Why RIAs are well-positioned to compete with wirehouses in the retirement space.)

Such programs exist at Morgan Stanley Wealth Management, UBS AG and Wells Fargo & Co. Bank of America Merrill Lynch last year upped the ante by fully launching a program that allows about 50 advisers to act in a fiduciary capacity and be paid on a fee basis for tasks such as oversight of investment menus and advice on an investment policy statement.

‘SELECT GROUP’

“[The fiduciary program] is designed for a select group that truly understands this aspect of plan governance,” said Tom McAuliffe, managing director and head of global institutional counseling at Merrill Lynch. The firm’s defined-contribution investment consulting program is available to plans with a minimum of $20 million in assets, and it now oversees more than $4 billion in assets among 27 clients.

Though wirehouses have the financial backing and big names to attract even the largest plan sponsors, they do face certain obstacles. For instance, plan sponsors may question their ability to manage the 401(k) space since these firms are associated with a variety of activities that span from wealth management to investment banking.

“There is a myriad of products out there that people think of when they think of UBS,” said Peter E. Prunty, head of institutional consulting for UBS Wealth Management Americas. “As a wirehouse, we need to be clear with the message that we have this [401(k)] capability and that this is a core business.”

To add to that issue, there are fierce competitors on either side of the asset spectrum. For plans with less than $50 million in assets, wirehouses are jockeying with independent financial advisers. On the mega-plan side, they are competing with major consultants such as Aon and Mercer.

For wirehouses, expertise in the 401(k) space evolved out of the firms’ track records on the institutional investing and consulting spaces. Before the Labor Department began scrutinizing advisers overseeing plans and the duties owed to the plan sponsors, it was fairly common for brokers and advisers to manage a handful of 401(k) plans that stemmed from longstanding relationships with wealth management clients who happened to own small businesses.

“The marketplace has changed dramatically,” said John Cate, a senior vice president at Merrill Lynch and one of the firm’s 401(k) specialist advisers. “401(k)s used to be a product sale, and it’s now a solution sale. Before, you were positioning products with vendors, and then it moved to a more consultative approach, where the vendor is agnostic.”

Mr. Cate, who can now act as a 3(21) co-fiduciary under Merrill Lynch’s program, recalled that when his team made the shift to a consultative role in the 401(k) space, his compensation also shifted. “We used to take 12(b)1 fees for compensation, and now it’s a quarterly fee for service for the clients we work for,” he added. “We have one sole focus: as plan fiduciaries.”

FIDUCIARY EMPHASIS

Plan sponsors have been placing a greater emphasis on fiduciary services, and the DOL’s regulations have only helped encourage that. Wirehouses turned toward certain advisers to help build their credentials in that space, looking not only to advisers who have accumulated sizable 401(k) books but those who also have proved their expertise in the foundations space.

“You need to demonstrate you are serious about the business; this can’t be a hobby,” said Ed O’Connor, head of retirement business at Morgan Stanley Wealth Management.

To keep only serious contenders in the game, firms have instituted minimum-asset levels. For instance, advisers at Morgan Stanley need to have at least $50 million in retirement plan assets to be considered for the firm’s Corporate Retirement Directors program. Advisers also need to obtain their chartered retirement plans specialist designation, which includes an end-of-course exam and requires renewal every two years via 16 hours of continuing education.

For the 401(k)-focused adviser, it helps to have a long list of clients to ensure profitability.

“Scale is critical in this business. You can’t do this for five or six clients,” Mr. Cate said. “You need to scale out with 25 or 30 relationships.”

ROLLOVERS

As far as clients’ rolling over plan money to the adviser after retirement or when moving companies, which was once the biggest incentive for 401(k) dabblers to get into the business, wirehouse advisers providing fiduciary advice can engage participants through education but won’t work with them on a wealth management basis unless the worker seeks the adviser for rollover help. “It’s very clear and disclosed that education may result in rollovers, but we never go in and market them actively,” Mr. O’Connor said.

Though it’s now standard among wirehouses to bifurcate their advisers into 401(k) specialists and dabblers, the next step for wirehouses is to find a way to help representatives who have plan expertise but who may not be ready to work in a fiduciary capacity.

A-level advisers, who are at the top of the fiduciary pyramid, may not be able to provide those services in a scalable way, while C advisers may not have the know-how on 401(k)s at all. Broker-dealers are finding creative ways to permit so-called B advisers to keep their plans and offer enhanced services — such as plan governance, design and enrollment improvement — without invoking fiduciary duty.

“There is a lot of middle ground,” said Jason C. Roberts, chief executive of the Pension Resource Institute. “A good adviser can move the needle with the participants, coming up with the right mix of providers, education — and stripping out the things that drag the plan’s success.”