When John Ludwig was called in to assess the retirement plan of a large electrical contractor in Indiana, it had a relatively low rate of participation, about 55%. The 600 employees earned on average between $40,000 and $50,000, comfortably above the national median salary for individuals. They should have been able to afford contributing enough to receive the employer match of $1,500 a year. So it was strange that so many weren't contributing to the plan at all.

But when Ludwig examined how the company worked, it became clear to the Raymond James advisor: most of the employees did not go to a central office. Almost all were based out of their trucks, going directly from home to their on-site jobs, and were never near the human resources office to drop off their 401(k) enrollment form. "What do you think happened to it?" Ludwig asked. "They're going to throw it in the truck and forget about it. There's nothing to help them understand why it's important, to a build a level of interest in the plan."

Ludwig, who is based in Indianapolis, stepped in and made some changes to the plan design, including automatic enrollment and automatic increases. He also held annual meetings with all the employees and gave presentations on all the benefits offered. Now four years later, plan participation has climbed to 85%.

Ludwig is not alone in looking to 401(k) plans as fertile ground for his business. Increasingly, advisors are betting they can navigate the challenges presented by plan sponsors just as well as they already counsel their individual clients. In fact, financial advisors breaking into the retirement arena is one of the biggest trends right now in the retirement industry, according to analysts at Cerulli Associates and Morningstar. As of the end of 2010, financial advisors managed defined contribution plan assets of $1.38 trillion, according to Boston-based Cerulli. Wirehouse advisors had $465.4 billion of that. Of that amount, "specialists" managed $184.3 billion, while "dabblers" managed $157.2 billion. "Non-producers" oversaw $123.9 billion. (Cerulli defines a non-producer as an advisor who receives less than 20% of revenue from retirement plan business. A dabbler gets between 20% and 40%, and a specialist receives more than 40%.)

Another research consulting group, Brightwork Partners of Stamford, Conn., estimates that the amount and share of assets under advisement by financial advisors in just 401(k) plans was $1 trillion or 31% of those assets as of the end of 2011. For all defined contribution plans, advisors control 28% of those assets, or $1.34 trillion as of year-end 2011. (Brightwork counts registered reps, insurance producers, financial planners and registered investment advisors whose client base is focused on the small to mid-sized plan market.)

As popular as this business is now, however, in a few years the industry likely will look back on these years as the good old days for this market. A round of interviews with advisors, analysts and other experts point ahead to a more challenging future for advisors trying to crack into this business for a number of reasons. More demanding customers, uncertain regulation, and the sheer complexity of this market are three of the factors.

But the thorniest issue may be that of fiduciary responsibility. At the moment, it's possible for advisors who have a traditional commission-based business to advise a 401(k) plan without being a fiduciary. But market participants and observers agree those days are probably numbered.

It seems obvious that this market would be sizzling now. As companies have eliminated traditional pension plans and forced employees to share the burden of providing for their retirement, 401(k) plans and 403(b) plans (for non-profits and the education sector) have become a much bigger business.

That, in turn, has prompted more advisors to start questioning leaving the business of advising the 401(k) plans of their small business clients to others. Why not learn the 401(k) market and keep all the client's business? After all, investments are investments. And why not develop relationships with other key corporate decision makers and business owners while advising a current client's 401(k)?

Regulatory Storms Ahead
But that decision to specialize is becoming tougher. The regulatory winds are shifting toward requiring anyone who advises a retirement plan to serve as a fiduciary. That means those who don't want the responsibility will likely have to forgo working with plans, according to Kevin Chisholm, a senior analyst covering retirement at Cerulli Associates. "That will make a challenge for wirehouses," he says. "There are so many plans out there, and not enough advisors to advise on all of them."

The Department of Labor has been tinkering with a rule defining who should act as a fiduciary when dealing with 401(k) plans for some time. A proposal put out for comment last year required nearly everyone who came in contact with a retirement plan to be a fiduciary. However, it was seen as too broad, according to Boston-based lawyer Marsha Wagner, who specializes in the Employee Retirement Income Security Act of 1974, the federal statute on private pension and health plans, better known as ERISA. "The DOL seems to want to raise the bar for people who are engaged in transacting business with and on behalf of plan sponsors," she says.

The DOL proposal was tabled, and there's no exact date for when a new rule is due. But when a new rule comes out, it will likely be crafted "to make sure the advice corporate retirement plan is done on a fiduciary basis, and there's no conflict of interest," Chisholm says.

But, as is often the case, the market is ahead of regulators. Even now, plan sponsors are starting to demand fiduciary services from their advisors. Moreover, the DOL upped the ante by putting out a new transparency rule in July that requires vendors serving retirement plans, including fund managers, record keepers and advisors, to disclose their services and fees clearly, as well as whether they are acting as a fiduciary. Similar financial disclosure rules will go into effect August 30 for plan participants.

"That ends up forcing the issue," Ed O'Connor, head of Retirement Services at Morgan Stanley, says. "It makes a plan more aware of what they're paying." There has long been confusion as to how plans are paying for which services, because often the billing has been opaque, with brokers often paid by the funds in a plan, rather than directly by the client. O'Connor says plan sponsors will likely start questioning fees and say: "'This is too complicated. Why can't I just pay you a fee for your advice?' Well, that's a fiduciary," he says.

And it's not just big plans demanding this higher bar. "The fiduciary status is quickly moving downstream," Brian Lampsa says. A Raymond James advisor in Chicago, Lampsa specializes in the 401(k) market and is a member of the firm's Retirement Plan Advisory Council. "Years ago we only saw it requested when go to $100 million in [plan] assets. Now many $5 million and $10 million plans are requesting it," he says.

The new DOL rule 408 (b)(2) also brings to a head the issue of what being a fiduciary involves, according to Fred Barstein, executive director of The Retirement Advisor University (TRAU). TRAU, in collaboration with UCLA, offers training and one of the designations for retirement experts. Barstein, who created a database company covering the retirement industry, also started the school two years ago anticipating the need to train advisors to counsel plans with a fiduciary level of responsibility and expertise.

By Barstein's count, of approximately 300,000 advisors actively engaged with the public, half of those advise one defined contribution plan. And, half of those, or 75,000, have at least three plans. Also, 5% of the total group, or 15,000 advisors, have at least five plans. He considers only about 5,000 of those advisors to be real experts, who have 10 plans with $30 million in assets and at least three years of experience. What's more, he says between 60% and 70% of the advisors working in the retirement industry are acting as a fiduciary, but not all of them say so in writing. This is now a problem. The new DOL rule will change that, forcing them to be formally named a plan fiduciary. "The big wirehouses who are aware of this understand rule 408(b)(2) and get the implications. They're strict," Barstein says, noting the firms' legal exposure if the advisors do not fulfill their fiduciary duty. "They're concerned with the 90% of advisors who don't know what they're doing."

By Barstein's reckoning, there are many non-negotiable tasks an advisor has in acting as a fiduciary for a retirement plan. First, they must create an investment policy statement. It details how many funds the plan will have, which asset classes will be covered and what the characteristics are of the funds. Every quarter the advisor must monitor the funds to see if they're meeting the investment policy requirements and how they're performing. Then the advisor must make sure the fees charged by each fund are reasonable, either by benchmarking them or going to the market and getting prices. Do they meet the prescriptions of the investment policy? Have they changed? Then the advisor must break down all the fees within the expense ratio to ensure each of them are reasonable, including the fees going to the transfer agent and the record keepers, as well as the actual money managers. Again, that means benchmarking or pricing each one.

And there are other services in the gray area including holding enrollment meetings for plan participants, and meeting with the participants themselves, Barstein says. Plus, there are meetings with the plan's investment committee, making sure all the plan's filings are done properly, and many more technical requirements. "It's not something you want to dabble in," Barstein says. "We call the ones that don't have at least five plans 'blind squirrels,'" he says, adding that 75% of all advisor-sold plans are advised by a blind squirrel. Barstein doesn't know the amount of assets under such loose management, but estimates it to run into the hundreds of billions of dollars. The good news is: advisors are slowly getting more educated. "Five years ago it was 90%, and I think it will come down to 50%, but it's not going to go away," Barstein says.

The Team Approach
Wirehouses are cautiously feeling their way towards helping their advisors wade into the retirement waters ahead of the new, stricter regulatory environment, Cerulli's Chisholm says. He adds that the likely direction most will take is to allow certain advisors to work on retirement plans along with in-house specialist retirement consultants. "They will have to work with the teams," he says.

Morgan Stanley, for its part, is doing just that. Of the firm's 16,000 advisors, some 500 are specialists, called corporate retirement directors, or CDRs, on about 200 teams. They have completed classes to gain designation as a Chartered Retirement Plans Specialist (CRPS) from the College for Financial Planning, or have an equivalent or higher designation. The CRPS is one of the five modules of the CFP designation. Another designation, the Certified 401(k) Professional (C(k)P) from TRAU, is also accepted by Morgan Stanley and other wirehouses, and is the training course to which Merrill Lynch sends its advisors. UBS and Wells Fargo also have their own programs.

At Morgan Stanley, advisors wanting to enter the retirement arena must work with the CRD specialists in almost all cases. (If the plan sponsor wants the firm to act as fiduciary, it is an absolute requirement. If a plan with under $25 million in assets does not require the firm to act as a fiduciary, a generalist advisor can go it alone.) If advisors want to become specialists themselves, they must prove they already have a level of experience and capabilities. They must have $50 million in qualified plan assets already on their books, plus an extremely clean record with FINRA. Even then, Morgan Stanley requires the advisor to apply and be reviewed. "If you're serious, then show me you're serious," O'Connor says. "They have clearly stated this is an important part of my practice as a specialist servicing 401(k) plans, and that's what we want here." About half of those who apply get approved.

In most cases, they already have the CRPS designation. But in a few cases of an advisor with solid knowledge and other credentials who did not yet have the designation (usually new recruits), the firm gave the advisor six to 12 months to get it. But if they did not get the designation, they were not allowed to continue as a CRD. Getting accredited is more than a weekend seminar. O'Connor says it takes four to five hours of study per week for three months to pass the test. Plus, there's all the continuing education. "It's a technical field and IRS rules and DOL rules keep changing, you have to keep on top of that," he says. But up-to-date knowledge of the byzantine codes governing 401(k) and 403(b) isn't all an advisor needs. The retirement market requires a specialized knowledge of not just investments, but specialized vendors, plan documentation, record keeping, mandatory disclosures and fee scrutiny.

O'Connor estimates that Morgan Stanley will double its number of CRDs in the next five years. "We think the market is going that way," he says. "The mid and small 401(k) market is growing and a growing share of them are expecting a fiduciary relationship. Our clients are asking for it and demand will grow. Then more FAs will decide 'I want to make this a major part of my business.'"

Yet, the margins for the retirement business are shrinking. Several observers say it's not nearly as lucrative as it was a decade ago. Most agree it doesn't make sense for an advisor to spend all the time and energy to learn the industry unless they intend to make it a substantial piece of their practice; O'Connor estimates at least one-third. "It doesn't have all of your practice, but it cannot be a hobby," he says.

The other major change for traditional commission-based advisors is in how they charge. To be a fiduciary, it is best practice to charge on a fee basis to avoid a conflict of interest. That means advisors should charge "level compensation," such as a flat number of basis points for the plan, or a flat dollar amount per quarter or year, rather than getting paid by each fund individually from their ongoing 12b-1 fees. Level compensation avoids even the appearance that the advisor is favoring one fund in the plan over another for his or her personal gain. This is especially critical now, according to Bo Bohanan, director of Retirement Plan Consulting at Raymond James, because money market funds have cut commissions. This does not mean the commission-based advisor has to overhaul his entire practice, but merely draw up new contracts for the retirement plans he serves, Bohanan says.

Still, all this knowledge takes time to build and so does the business. When Ludwig made the move to being a specialist from being a wholesaler of 401(k) plans it took him six months to win his first client. However, he says: "It was definitely, definitely worth it."