Market and societal pressures are causing, on the one hand, the defined contribution industry to contract, which, at the same time, has the potential to explode. Why and how is this happening now? Let’s start with the contraction.
Contraction
Consolidation in the airline industry, most like DC record keepers, was driven mostly by consumer demand for better service and lower costs. While plan sponsors are not the end consumers of 401(k) or 403(b) plans, pushed by fiduciary concerns and litigation, they have driven down fees for record keepers, advisors and asset managers. Only those with scale can survive and though advisors helped renegotiate service agreements and find new providers and lower cost investments, the time has come for plan sponsors to look at advisory services and fees more closely.
All DC sectors are contracting in part because of a flood of private equity and venture capital money that have invested over $1 billion in fintech record keepers and even more for asset managers, providers and RPAs. Those with resources and capital are squeezing out competitors while the big fish swallow up the smaller ones. The over 3,000 third-party administrators are not immune, especially if PEPs take hold with only those providing PPP 3(16) services benefiting.
IRAs will contract assuming new fiduciary rules but also because more plans are eager or willing to retain assets of terminated employees providing access to payout tools and retirement income products as well as more RPAs moving into wealth management. The math is pretty simple—much lower investment costs and lower advisory fees that continue to improve.
Record keeping TPAs, which used to number over 400 10 years ago, have dwindled to just over 150 due to acquisitions, cost of technology and competition.
As fund fees decline, only asset managers with scale can keep lowering costs, causing smaller ones like Putnam to sell. With greater distribution fees charged by record keepers, broker dealers and aggregators, as well as more money moving into TDFs and passive investments, smaller DCIOs are struggling to compete with the top 10. If PEPs take off, the lineups will be further trimmed.
The current 43 national record keepers will continue to dwindle as will the 25 that serve RPAs. led by the Fab Five, payrolls providers and three others uniquely positioned. Do we really need that many?
Through attrition and acquisitions as well as the graying of RPAs, fewer than the current 13,000 specialists with 50% or more of their revenue from DC plans will exist as convergence and dwindling plan fees force them to focus on wealth services with only a few able to make the transition.
Explosion
At the same time, the DC market is exploding driven by the convergence of wealth, retirement and benefits at work as well as the incredible growth of the small market due to SECURE 2.0 tax incentives, state mandates and PEPs, along with in-plan retirement income, if the industry can get their act together.
Payrolls and fintechs are feasting on small business plans using a different business model than traditional asset-based record keepers.
But the real explosion will come from the hordes of over 275,000 financial advisors that do not currently focus on DC plans, of which 63,000, according to Cerulli, have 15%-49% of their revenue from retirement plans. Whether it’s the attraction of new clients within 401(k) plans where most wealth starts or the fear of another advisor disrupting the relationship the wealth advisor has with a business owner or manager, these non-specialists are no longer ignoring retirement plans. Most business owners or managers have a relationship with a financial advisor—why not use them to manage or start a plan?
Wealth advisors will leverage digital tools and AI to scale their personalized services for the masses as well as plan tools and support from home offices. There are providers emerging to help like Pontera, which enables an advisor to manage a client’s DC plan without accessing their ID or password. The Portability Service Network will make the transfer and consolidation of DC plans and eventually IRAs easy and instantaneous, while Meet Beagle is already helping DC participants.
Alternative asset managers, especially PE firms, are greedily eyeing DC plans with Georgetown University estimating that participants are losing out on $35 billion of returns annually as fewer companies go public. With more money in professional managed products like target date funds and managed accounts, their entry seems inevitable as does the opportunities for annuity providers with retirement income.
So while many providers, advisors and asset managers as well as the various members of the 401(k) food chain are contracting, struggling to compete with larger firms and adapting to a new business model, others will seize the opportunity and adapt while new entrants like wealth advisors, fintech record keepers and digital tool providers leveraging AI will step in. Just as a tiny atom when squeezed can produce enormous power, so will the DC market, currently under massive pressure, explode.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.
