Some experts are predicting that there will be fewer advisers focused on the 401(k)/defined contribution market. With greater competition, price pressure, more onerous regulations and increased fiduciary liability, that argument is understandable. But regardless of the pressure and challenges that the DC market poses, the number of elite advisers that focus on the DC market will double in the next five years because of the size of the opportunity.
There are roughly 300,000 actively engaged financial advisers serving the public - 50% or 150,000 advise on one or more DC plans. Half, or 75,000 advisers, have three or more plans, while 15,000, or 5% of the market, have five or more plans. Only 5,000 advisers, or less than 2%, are considered "elite" - having at least 10 plans, $30 million and three year's experience. There is a sub-group of "super elites" with 25 plans or more than $100 million. Of the 625,000 DC plans with between $250,000 and $100 million in assets, only 125,000, or 20%, are advised by advisers with at least five plans under management - the rest either do not have an adviser or use what is called a "blind squirrel."
Many of the elite advisers and most of the super elites have doubled their business since the end of 2008.
While the demand is overwhelming among plan sponsors that have started to realize the most important and perhaps only decision that they need make is to hire a qualified DC adviser, the opportunities for financial advisers in the DC market are even greater.
Combined assets in the DC and IRA market are more than $10 trillion and will only continue to climb as for-profit and not-for-profit companies and even government entities move from employer-directed defined benefit-like plans to participant-directed DC plans.
Participants in these DC plans need advice and guidance from experienced advisers to help with the accumulation and distribution phases of their financial lives, yet the vast majority do not retain or have access to a qualified financial adviser. While very few DC providers and even fewer DC advisers have been able to capture significant IRA rollover assets, retirement income planning, which will overtake the rollover market, offers more hope to DC advisers - if not providers.
Further, advisers that manage all benefits for an employer, including group and retirement plans, are not only in a better position to maximize their revenue and profits, but there is also less risk of losing their clients to another adviser.
Regardless of the opportunities, the challenges to managing DC plans are real. It takes time as well as technical and business expertise to build up plans and assets which yield less than with health care or wealth management services.
The pricing on DC assets for advisers will continue to drop with increased fee disclosure mandated by the Labor Department, as well as increased competition and market sophistication. The growing number of regulations and government scrutiny make it more difficult for an adviser to manage DC plans and to represent both the employer and the plan participants. Most advisers focused on the DC market will need to become named fiduciaries with increasing oversight and penalties.
It takes focus, patience and determination to be a successful DC adviser. The challenges of the DC market will force out many blind squirrels - driving their current market share from 75% to 50% in the next five years, with the number of elite DC advisers growing from 5,000 to 10,000 leveraging these opportunities.
In addition, more direct-sold providers will work with experienced DC advisers, as Paychex and ADP have done the past three years, recognizing the benefit to employers, participants and to their own businesses. While the DC market in particular - and the retirement industry in general - offers significant opportunities, dabbling in this market can be dangerous and costly. Go strong or go home - there is no middle ground.
Barstein is the founder and executive director of The Retirement Advisor University at the UCLA School of Management Executive Education. Reach him at fred.barstein@TRAUniv.com.
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