The 4 Steps to Adding AUM
in the 403(b) Space

Back in 2003, one of our independent financial advisors approached us to discuss our willingness to start managing money in the workplace retirement market, specifically 403(b) accounts at a large university. Our initial reaction was “Absolutely not!” The 403(b) market historically has been a very unfriendly place for financial advisors because of the inherent restrictions placed on the plans, like those listed below.

• Restricted access for financial advisors
• Limited or non-existent ability to deduct management fees
• Inadequate systems for handling trades and reconciliations
• Poor selection of mutual funds

Despite these reservations, we reluctantly agreed to wade into the 403(b) waters until we became well-accustomed to the nuances of the market. At the time, each institution would have multiple plans with multiple providers and zero consistency. The 403(b) market has come a long way since we started, and today the future is brighter for financial advisors who want to serve clients with these plans.

With the experience of time and persistence, we have been able to successfully navigate the 403(b) world, but not without our fair share of trials and tribulations. By working with Potomac as your partner in the 403(b) market, financial advisors can gain access to this untapped potential and our years of real-life operational experience.

Examine your current book of business

The best way to step into the 403(b) market is to go through your current book of business. There is a high likelihood you already know and provide guidance for many teachers, nurses, doctors, etc. Where do they work? Is anyone helping them with their 403(b) accounts? (Pro tip: Partner with a CPA who can refer clients from certain employers. These clients are especially in need of guidance from financial advisors!)

With the permission of your client, you can securely share a client 403(b) account statement with us. This statement will contain details on their workplace plan, such as the name, location and plan ID. Once we have a statement in hand, we can start the plan research process, including reaching out to Fidelity to get some details on the plan.

Step 1: What’s your location?

The path to success in this market starts from something you don’t have immediate control over–the place where you live. Our preferred custodian in this space is Fidelity Investments, and they are not available on every plan. Your location will determine which plans through Fidelity are available to you.

Even if the client statement you provided came from Fidelity, it’s still important for us to confirm if Fidelity remains a vendor for the 403(b) plan. This market changes at a fast and furious pace.

Step 2:  Financial Advisor Access

Does the 403(b) plan allow participants to access the services of financial advisors? Forward-looking plan administrators recognize that financial advisors play an important role in the lives of their participants. The 403(b) plan is not going to endorse, promote or recognize a certain financial advisor, because they don’t want a marketing circus to ensue at their workplaces.

What the plan will likely do is allow participants to seek the guidance and assistance of a trained professional. It’s important for advisors to respect the processes established by the 403(b) plan and play by these rules.

Step 3:  Fee Deduction

No one works for free. For you to get properly compensated for the financial guidance you provide, the 403(b) plan must allow fees to be deducted from client accounts. You don’t have to worry about how it works, because as a full-service turnkey money management firm Potomac takes care of billing, fee remittance and payment to our financial advisors. Potomac will also determine if the 403(b) is set up for fee deduction; otherwise, there’s no point in pursuing this business.

Step 4: The Investment Lineup

When a 403(b) plan contracts with Fidelity, it’s their decision on what investments to add to the plan’s lineup. It’s like the choices offered when purchasing a car—Fidelity offers a standard no-frills lineup or a fully-equipped model, and probably something in between as well. The type of investment lineup selected by the plan has a major bearing on how Potomac can apply our money management strategies.

Most standard 403(b) plans include the entire Fidelity mutual fund lineup. In fact, this is how we began managing money in this space originally. The clear majority of K-12 plans offer this type of lineup, although higher education and hospital systems often take a different approach.

With all the recent changes to the 403(b) market, plans have begun to expand their fund lineups, albeit not directly. To reduce their fiduciary liability, 403(b) plans have begun to restrict the number of fund choices they are responsible to review, often drastically down to 10-15 choices. However, they are offering participants the option of a brokerage window, where a client can open a brokerage account within their 403(b) plan and access up to 3,500 mutual funds. The brokerage account can then be invested in any of Potomac’s strategies.

Of course, that degree of choice has advantages and disadvantages. A wide range of investment options seems great, but with all these choices how do investors decide where to allocate their retirement savings? We have a process for that!

Where can Potomac help?

The research process is the most important cog in the wheel. Once we have determined that a plan is available and meets all criteria for our management strategies, a financial advisor can begin to assist participants. Since Potomac is a turnkey money management shop we handle all aspects of portfolio management, asset allocation, reporting, billing, etc. while you focus on doing the work that truly adds value — building the client relationship.