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How to Save Your Client’s 401(k) Without Violating the DOL Rule

In the summer of 1999, one of my online research providers began to furnish historical price charts on mutual funds. In addition, their service allowed me to rank mutual funds by past investment performance and current relative strength calculations.

My clients owned a few mutual funds at that time. But they were forced to own many more mutual funds in their company’s 401(k) retirement plan account.

Not knowing any better, I asked one of my best law firm clients at the time if he would be interested in an independent, third-party analysis of his menu of Fidelity mutual funds on his law firm 401(k) retirement plan.

My client’s response was, “Absolutely. I would love a second opinion on my 401(k).”

I was shocked when I received a copy of my client’s quarterly 401(k) statement. He had three times the amount of money in his 401(k) than he had in the investment account that I managed with him.

Since that meeting, I built an individual company 401(k) retirement plan participant investment advice niche business upon a single phone call and follow-up meeting. I have not stopped prospecting for individual company 401(k) investment advice clients in the last 18 years.

I recently presented a conference call to investment advisors on how I built my individual company 401(k) investment advisory business. No surprise that the first question they asked me was how the recent enactment of the Department of Labor (DOL) fiduciary rule would affect my practice.

I am not a compliance expert. But I do know a little bit about the registered investment advisory (RIA) business. Under the DOL rule, a fiduciary level of investment advice will be phased in on all company retirement plans and individual retirement accounts (IRAs).

In the RIA’s world, providing investment advice on any client asset base, regardless of location, is a fiduciary act. For an advisory fee, I provide fiduciary investment advice to all my clients on all the accounts that I manage.

The most important thing to realize about the fiduciary rule is that it has taken years to get to this point. This topic has also gained the attention of individual company 401(k) and IRA account investors.

 

How to Explain to Clients

A call from an insurance advisor to a good client will generate a positive response. You certainly can use the current headlines to change your investment advisory practice forever.

The key words to explain to your client are “fiduciary” and “disclosure.” Those terms make up the largest part of the DOL rule. You can easily cover both of those concepts in a 30-second phone conversation. The phone call should end with a request for a copy of their current company 401(k) retirement plan menu and most recent quarterly statement.

A fiduciary acts in the client’s best interest at all times. That new level of liability would be no problem for your insurance practice. You are not selling investment products in this example. Remember that the client is locked into a default company 401(k) retirement plan menu.

Your fiduciary act is to provide investment advice on that menu of mutual fund options available on the company 401(k) retirement plan menu.

The full disclosure part requires more work. Individual investors never take the time to completely analyze the annual costs on the default menu of their company 401(k) retirement plan. Your fiduciary act is to obtain that information and feed it back to the client in terms that they understand.

Your next fiduciary act is to provide the complete disclosure of the annual investment performance of each default menu mutual fund option. This information is a legal requirement of company 401(k) retirement plan sponsors and providers. Again, your individual company 401(k) participant client has never taken the time to review or understand the information.

Again, I am not a compliance expert. But I have read more Employee Retirement Income Security Act opinions and sat in on more DOL rule webinars than most insurance agents have. 

The consensus now is that if a fiduciary investment advisor establishes an investment advice relationship with an individual company 401(k) retirement plan participant prior to retirement, that advisor has a much easier set of requirements to gain the IRA rollover.

 

Start the Process Now

Every investment advisor wants the company 401(k) retirement plan rollover. Why not start that process while your best clients are still working?

Would you like to move your investment advisory relationship to the front of the line with your best near-retirement clients? If you start providing investment advice now on their existing company 401(k) retirement plan accounts, there will be no line when they retire.

Many investment advisors who contact me for information on establishing an individual company 401(k) investment advice business operate from a standpoint of fear. Don’t let the fear of the unknown stop you.

Did I know that I could really help my lawyer client improve his company 401(k) retirement plan investment management decisions? No.

Did I know that when I offered a logical and organized investment management strategy for the law firm’s Fidelity mutual fund menu, every other lawyer at my client’s firm would become a prospect for me? I soon figured that out.

The most important thing that I did was not let the fear of the unknown stop me from trying to use my investment research tools to help my client’s 401(k) account. I realized that the most important event to come from my career-changing experience took place in my own mind. I let go of my fear.

Your fear may tell you the following:

 

» I am only an insurance agent. I can’t ask my clients for copies of their 401(k) retirement plan menu and most recent quarterly statements. What value can I provide?

 

» I don’t have any experience with mutual funds. What resources are available to me to explain cost and investment performance history to my clients?

 

» No advisor at my broker/dealer has ever provided individual company 401(k) retirement plan participant investment advice before. What will the compliance department say?

 

What is the largest piece of stock and bond market investment assets owned by your best clients who are still employed? If your client household has two working partners, I don’t even need to ask you the same question. The answer in both cases is the household company 401(k), 403(b) or 457(b) retirement plan accounts.

The U.S. stock market is at near all-time highs. Interest rates in this country already are rising off all-time lows. Where will your next great client asset-

gathering opportunity come from? I already explained it to you.

Why wait several years for a potential company 401(k) retirement plan rollover — and then stand in line with every other investment advisory in your local market?

Begin a game plan now to become the investment advisor of record on your best clients’ company retirement plan accounts while they, and their spouse or partner, are still working.

 

Ric Lager is founder and president of Lager & Co., a registered investment advisory firm based in Golden Valley, Minn. He was the co-creator of the “No More Pies” investment series for financial advisors and author of Forget the Pie: Recipe for a Healthier 401(k). Ric may be contacted at [email protected].

Ric Lager is founder and president of Lager & Co., a registered investment advisory firm based in Golden Valley, Minn. He was the co-creator of the “No More Pies” investment series for financial advisors and author of “Forget the Pie: Recipe for a Healthier 401(k).” Ric may be contacted at [email protected] .