The Hartford's recent announcement to divest its retirement division has more to do about the economy and the parent's corporate direction, perhaps instigated by an activist investor, than it does about the quality of its retirement business.
Hartford is and has been in 401(k) heaven based on a rather healthy 401(k), 457 and 403(b) business, top five market share based on number of plans, $52 billion in AUM as well as a series of successful strategic acquisitions.
Sign of the times
The announcement will still cause short-term turmoil and opportunities and is indicative of some fundamental challenges the DC industry faces over the next few years.
Hartford's plan sponsor clients are being barraged by calls from advisers scouring the various 5500 databases looking to take over their plan, causing concern and lots of phone calls to their current adviser.
While there's a good chance there will be no change or disruption in service as a result of The Hartford divestiture, it's also possible that a competitor could buy them - forcing a systems conversion.
Hungry advisers might be suggesting to Hartford clients that, rather than wait for a change not in their control, why not be proactive?
If their current adviser is an experienced professional who the plan sponsor trusts, it's likely that no change will happen and it would also be prudent for the incumbent adviser to wait before they make any rash decisions on switching record keepers, though they should be prepared.
Acquirers of big blocks of businesses will do all that they can to ensure a smooth and pain-free transition, but some factors may be beyond their control.
Small market implications
The divesture has interesting implications for the entire industry, especially the small market adviser-sold Defined Contribution business.
The small DC market is dominated by insurance companies that may be pricing plans competitively today but have a lot of legacy plans that, if they went to market, would be priced lower, and in some cases much lower.
While 408(b)(2) plan level and 404(a)(5) participant level fee disclosure will not cause overnight seismic shifts, it will continue the trend towards more disclosure and lower fees for what many believe is a commoditized service exacerbated by the many benchmarking and RFP tools readily available to most advisers.
The expected consolidation of record keepers has been slower than most of us expected over the past three years but, including The Hartford, there are at least four major providers that will likely change ownership within a year - covering almost 100,000 plans and millions of participants.
Will fee disclosure leading to further price compression, combined with other factors like changes in corporate strategies, cause even further consolidation over the next 18 months?
Inherent is these events and trends are obvious challenges and opportunities for DC advisers.
The Chinese symbol for opportunity is the same one for danger. When record keepers exit the market or are sold, there is more opportunity for experienced advisers to meet with and convert prospects.
The experienced ones will rarely be displaced. But the blind squirrels who represent 75% of the adviser-sold market will continue to be squeezed out.
The danger is that, just like record keepers, many advisers have legacy plans which, if they were to be re-priced would cause a significant reduction in advisory fees based on today's market.
Events like The Hartford's divestiture, fee disclosure regulations and the normal market dynamics will expose plans that may be priced above market rates.
Though it may not be prudent or even affordable for advisers to market-adjust their fees for all current plans under management, these same advisers should be creating a business plan that anticipates the possibility of that happening and have a plan in place to run their business accordingly.
Reach Barstein, founder of The Retirement Advisor University, at fred.barstein@TRAUniv.com.
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