401(k) Specialist Issue 3 - 2018 - 39

401(k) COACH'S (K)ORNER
Rethinking Your Small
401(k) Plan Profitability
By Randy Fuss
I SAT ON A PANEL at a recent industry
event to discuss the small plan 401(k)
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 secondto-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 401(k) 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 401(k)
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
" 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. "
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 401(k) 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.
ISSUE 3 2018 | 401kSpecialist.com
39
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401(k) Specialist Issue 3 - 2018

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