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LPL, NFP Sharpen Retirement-Plan Tools

By Murray Coleman October 30, 2014

As retirement-plan assets swell, more financial advisors are dabbling in the 401(k) space as a way of growing their business. And to help them do a better job, LPL Financial and National Financial Partners are revamping their ranking systems for the funds where workers plunk their retirement savings.

The new scorecards let advisors perform more rigorous analysis in picking the best investment options for plan sponsors. And they’re coming not only from big service providers but also from smaller, specialist RIAs in the field that are customizing scorecards so advisors can fit them to particular plan-participant profiles.

Rating funds is hardly a new exercise. Everyone from Morningstar to Charles Schwab does it. But the regulations around retirement plans, which prescribe a painstaking process for working with the sponsor company and its investment committee, mean recommending funds to a plan is entirely different from advising an individual client, says Troy Hammond, president of Pensionmark Retirement Group in Santa Barbara, Calif., whose $2.3 billion in AUM is almost entirely in DC plans. The new rating tools add features to streamline the procedure.

“The Department of Labor and ERISA stress a well-documented process,” he says. “Trying to manage more than a half dozen plans at a time just takes too much research and documentation to do without one of these tools.”

Troy Hammond

His firm currently uses a scoring system for actively managed funds that LPL, his broker-dealer, has offered since 2007. But early next year, LPL will roll out an upgrade to its 5,500 retirement-plan specialists. The new system will cover target-date and passively managed funds for the first time, according to Jason Nicastro, an LPL investment strategist.

Even that’s not good enough for Hammond. Pensionmark is seeing so much demand from other retirement-plan advisors that next month it will launch a proprietary scorecard system that it will bundle with the back-office services it currently provides to 55 other DC-plan RIAs. This side business has become such a significant growth engine that Hammond is remodeling his RIA along the lines of SageView and CapTrust — support providers to DC specialists that, Hammond points out, also offer their own investment scorecards.

Pensionmark’s new tool will help advisors organize documents, respond to sponsor RFPs and create the reports required by regulators. The firm also throws in educational and marketing materials. And the scorecard will let advisors see how different types of funds, be they in large-cap stocks or intermediate-term bonds, work together in a portfolio. Most other systems don’t permit this holistic view, says Hammond.

For now, Pensionmark uses LPL’s 12-point fund-scoring system. Like most others, it uses algorithms to size up funds by factors including volatility, style drift and consistency of returns versus peers. Index and target-date-fund rankings in the new scorecard will emphasize different factors from those used to evaluate, say, core stock or bond funds.

Depending on a practice’s size, Hammond says, a fund scorecard system can cost anywhere from $500 to $1,200 a month. “A more off-the-shelf type of package without a lot of customization might work well for an advisor working with a half-dozen plans,” he elaborates. “But for anyone trying to expand past that point and really build their DC-plan practice, it’s probably worthwhile to do some comparative shopping. There are a lot of different options coming out, each with different bells and whistles.”

At NFP, plans are in the works to deliver more customized tools to 401(k) advisors early next year, says Joel Shapiro, a senior vice president at the broker-dealer. While declining to provide specifics, he says NFP in late 2013 revamped its scorecard for target-date funds so users can rate their efficacy for plans with different participant profiles, including average age and account size.

One fan is Dan Mulheran, managing partner of the KNW Group in Minnetonka, Minn., which manages $1.5 billion, mostly in retirement plans. He figures NFP’s scoring system, which has been around since 2004, cuts his staff’s time spent by 25% in organizing, researching and reporting investment recommendations to plan sponsors.

“We wouldn’t be winning nearly as much new business without being able to take advantage of an integrated set of scorecards,” he says. “At the same time, these tools are helping us to grow without sacrificing service to our existing clients.”

Mulheran is looking forward to NFP’s enhancements, too. “These investment scorecards keep getting better and better,” he says. “We’re seeing all sorts of improvements as retirement plan assets grow.”