Wealth managers who are considering managing 401(k) plans need to re-think those plans, according to Brian Murphy. Murphy, who runs Pathways Financial Partners, a Tucson, AZ-based investment advisory firm, says the 401(k) business has become a highly commoditized industry that makes it easy for clients to switch to an alternative, lower-cost provider.
Murphy began his career in 1984 at Merrill Lynch and placed his first 401(k) plan with Integrated Resources, a firm that went bankrupt shortly after the 1987 market crash. He worked for several mainstream brokerage firms including Sutro and Piper Jaffray, before founding Pathways in 1998.
Beginning in the early 1990s, he focused on managing the assets of large 401(k) plans and consulting for the companies that operate those plans. Over the next decade, his business grew until he was managing and consulting on nearly a billion dollars of 401(k) assets. Some of his clients were Fortune 500 firms, and they included rail car leasing companies, hotels, casinos, and newspapers.
While he was collecting an average of 35 basis points in fees on these assets, he found that the cost of servicing and retaining clients was eroding the profitability of his business.
One of his 401(k) clients – a company that refurbished and resold telephone systems – illustrates those problems. Murphy began working with this client when it had 10 employees and, as its business expanded, the number of employees grew to more than 150. Murphy was managing their 401(k) plan, meeting with employees quarterly at several locations, and handling their questions via telephone through a call center he had set up in his office.
Once the plan assets grew to over $25 million, competitors began soliciting the client. Many were wirehouse representatives and young advisors attempting to build their practices. They lacked the infrastructure that Murphy had developed – they did not have a call center, for instance, and did not subscribe to services like RPAG, which, for $12,000/year, allows Murphy to compare the fees and track records of vendors and investment managers in the 401(k) space. “No kid from Merrill Lynch is going to pay $12,000 to get that information,” Murphy said.
Murphy was forced to continually defend his value proposition to his client against competitors who were willing to offer “the same” service for less money. Sometimes it was a wirehouse broker, other times it was a relative of an employees or the representative who sold them their health care plan, and often it was a someone from a large commercial bank who would offer to manage the 401(k) plan as part of a total banking relationship.
