I sat on a panel at a recent industry event to discuss the small plan 401k market. We posed the following question to attendees: Do you measure individual plan profitability?
Over 60 percent responded no, even though the audience was comprised primarily of advisors that managed over 25 plans. It reminded me of a regular dialogue I have with plan advisors.
“What is the minimum plan size you manage?” I routinely ask.
“$5 million,” is the typical reply.
I ask a pointed follow-up question, “What was the size of the last plan you brought aboard?”
After a significant pause, “$1.2 million, but it was a referral from a prominent CPA I have been working on.”
“Fair enough,” I respond, with one additional question. “What about that second-to-last plan you won, how big was it?”
This time the pause is longer, but the reply comes in a hushed, almost apologetic tone.
“$600,000, but this one was from a local TPA with whom I have been trying to cultivate a relationship.”
As a practice management consultant in charge of our Retirement Advisor Institute, this exchange is an ongoing quandary for many 401k plan advisors. On the one hand, they know that a plan needs to be of a certain size to generate enough revenue to be able to engage in all of their services, and be profitable.
And yet, the service levels don’t align with revenue in some of their existing plans. Even without formal measurements, they know multiple plans are “in the red.”
On the other hand, referrals that come from certain centers-of-influence are invaluable and most can’t afford to say no to smaller opportunities.
Over 94 percent of the 500,000-plus 401k plans in the U.S. are below $10 million, but they represent only 15 percent of the assets.
While some plan specialists have effectively moved to the $10 million-plus market where more assets reside, they’re competing for the other scarce 6 percent, where margins are increasingly thin.
The vast majority of successful plan advisors will continue to work almost exclusively in the smaller end of the plan market where opportunities are abundant.
Thus, the need to figure out how to rethink profitability.
What might be a fresh approach for a plan advisor to improve their bottom line?
The first step is establishing a billable hourly rate; $250 to $300 per hour is deemed reasonable by any industry benchmark. Even if an invoice is never billed directly to a client, at least start thinking about your time’s worth.
Next, consider a strategy I call the “none of me, some of me, most of me, all of me” approach.
Maybe there are opportunities to refuse.
It might be start-ups that in the past have been too time-consuming, and/or haven’t grown as expected. This is the “none of me” layer.
Some referrals will continue to be the $700,000-sized plans where revenue potential will be limited. Assuming $3,500 of annual revenue and desiring a $300 billable hour, you’ll need to limit core activities to about 12 hours a year and outsource the rest. This is your “some of me” approach.
The “most of me” layer is simply a slightly higher plan size and slightly more revenue, which allows you to take on a few more core activities while still outsourcing a portion.
Finally, there is the “all of me” level. It’s where there is enough revenue (i.e., a $5 million plan) to fully engage in all of your core activities and be profitable. One other “all of me” strategy to consider is a minimum plan fee.
Rather than establishing multiple layers, some successful 401k plan advisors in the small market charge basis points on assets subject to a $10,000 minimum. It might be too rich for a start-up, but the key is to grow assets so at some future point they exceed minimums.
Randy Fuss is a practice management consultant at CUNA Mutual Retirement Solutions.
Randy Fuss is a practice management consultant at CUNA Mutual Retirement Solutions.
