Five to 10 years ago, most retirement plan advisers didn’t touch ERISA 403(b) plans. There were just a few specialists serving that new market and, as with any new business, it took time and planning to enter it.
But there’s little difference between 403(b) and 401(k) clients, and today many RPAs work with associations, nonprofits, private schools and universities that sponsor 403(b) plans. In fact, many RPAs prefer to work with 403(b) plans, as those plan sponsors care more about their employees.
The next blue ocean strategy for RPAs is targeting the government 457 and 401(a) market. Though there are barriers to entry, the opportunity is ripe. Public entities like fire and police departments, as well as municipalities and counties, are struggling to fund defined-benefit plans in the face of dwindling tax revenue — accelerated by the COVID-19 crisis — and the longer lifespans of retired workers.
Just as with defined-contribution plans, more than half of the $6.5 billion government plans are with large entities. But the opportunity is still immense, and the need is growing. The seas are clear, with little competition, unlike the bloody 401(k) and 403(b) waters, where demand for services is growing and fees are declining.
First, you need at least three clients to respond to an RFP, which most government entities require. Mike Montgomery, managing principal at Montgomery Retirement Plan Advisors, got started when an ERISA lawyer asked him to help a client with a record-keeper RFP, which led to his firm being hired. He got two more clients through referrals and now manages $1.2 billion in assets for government entities in the Tampa area, which accounts for 55% of his firm’s assets and 25% of revenue.
With new cities being spawned in the Atlanta area, David Griffin at Atlanta Retirement Partners has landed a few startup plans, mostly police and fire departments, and now has 10 plans with $400 million in assets.
Sometimes just doing piecework can get advisers in the door, Montgomery said. Meanwhile, Griffin said he has found success networking with government associations.
These 457 and 401(a) plans tend to be larger than typical DC plans, with less turnover. Many RPAs shy away because they think the government market is too political, but Griffin and Montgomery said that procurement, rather than politicians, drives business. Griffin said that he rarely if ever meets elected officials.
The need for advisers is growing in the 457 market, just as it did with DC plans, initially with plan sponsors, but eventually with participants. There are some focused providers that do not work with advisers, like ICMA-RC, which declined to be interviewed for this column. But most, like Empower, Voya, AIG and Nationwide, have a rich history working with RPAs. They might even at some point refer clients, as fees are either asset-based or flat fee, not coming out of the providers’ fees.
Eric Levy, who worked at Putnam before joining AIG, where he is executive vice president, said he sees three opportunities and issues that RPAs can help with:
1. Managing plans.
2. Consolidating multiple record keepers.
3. Working with participants.
AIG gets 70% to 80% of its business from consultants, a few of which focus on this market, with a growing number of RPAs entering. There are different rules and ways of doing business in the 457 market, and advisers need to understand the procurement process and deal with unions that have prior relationships, giving specialty firms an advantage, Levy said. But he said that many plans do not have an adviser or consultant, and he sees plan sponsors looking for more choice to help them and their participants.
Private corporations started moving from DB to DC plans more than 20 years ago, with individual retirement accounts and DC plans now accounting for $19.7 billion of assets, compared to $3.4 billion in DB plans, according to the latest ICI data. 403(b) plans started making the move five to 10 years ago. The 457 market is next.
The COVID-19 crisis has also made clearer the need for first responders. RPAs are profit-motivated, but they also want to help. What better way to help than to work with local entities, especially fire and police professionals?
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