Some say that the Defined Contribution/401(k) market is mature and about to experience significant consolidation. There are 45 national record keepers in this deflationary, over-regulated market. There's limited opportunity for organic growth or major market share shifts. However, though we are starting to see signs, consolidation is slower than predicted. So maybe the DC market is not mature, and record keepers (plus another 500 local record keeping TPAs) are holding on until the industry transforms itself into something entirely different and more lucrative.
DC plans are an opportunity for employees to contribute to their retirement with no financial obligations and limited fiduciary responsibilities by the employer. Like a worksite benefit, rather than an employer-paid one, each participant should be considered to be a client. Sure, the company has to be sold on one record keeper and adviser, but after that there are many clients. If the DC market is morphing into a worksite benefit more similar to non-ERISA, K-12, 403(b) plans without the baggage or multiple record keepers and advisers, then perhaps it does not make sense to bifurcate the market into small, mid-size and large plans or even retail versus professional firms.
Most successful DC advisers do not focus on participants. The sales and technical skills that make them successful do not transfer to dealing with individuals. In addition, the current DC pricing model makes no sense. A $5 million plan where the adviser might charge 30 basis points makes sense when you are only servicing the employer, but it makes no sense if DC plans are a worksite benefit where each participant is a unique client.
Participants that elect personalized service should be placed in more customized investments solutions, taking into account outside assets and Social Security. The DC market has moved from stable value in the 1980s to retail mutual funds in the 1990s to target-date funds in the 2000s. Customizable managed accounts, personal investing advice and retirement income planning makes more sense, but only if the adviser is properly compensated and has both the mindset and skillset to make that transition.
Technology has to keep up to service a worksite benefit DC plan. We have moved from balanced forward record keeping in the 1980s to daily valuation in the 1990s with no real break-through technology innovation in the 2000s. Some new record keeping systems are taking a bottom-up, rather top-down, approach. Eventually, they should be connected to each individual's outside assets as well as Social Security so that each participant, with help from their adviser, can manage their money like a personalized DB plan - making retirement income a reality not some over-priced pipe dream. Perhaps even health care benefits and costs should be integrated.
So, if the DC market is not mature but about to be reincarnated into a worksite benefit, what has to happen? Today, there can be as many as five entities touching a DC plan, including the record keeper, adviser, broker dealer, TPA and money manager. Not to mention the employer, employee and our friendly government regulators. Getting everyone aligned is a challenge, especially the market leaders who have no incentive to change the rules. Perhaps advisers can quietly shift their models using record keepers and money managers who support a worksite benefit DC model.
Barstein is founder and executive director of The Retirement Advisor University in collaboration with UCLA Anderson School of Management Executive Education. Reach him at Fred.Barstein@TRAUniv.com.
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