While some people justifiably claim that the defined contribution/401(k) market is mature, there's a school of thought that believes the market is about to go through radical changes. Primarily, a broad-based realization that DC plans will become the main retirement vehicle for the post-baby boom generation, causing greater scrutiny, focus and hopefully innovation for all involved.

Technology will affect how participants interact with advisers, record keepers and plan sponsors, as well as change the face of record keeping infrastructure and managed accounts. Advisers, broker dealers, record keepers and DCiO firms that innovate their way to their own "blue ocean" strategies will avoid the current tsunami of price compression caused by the perception of commoditization, and in the process separate themselves into a super-elite category. Here are some predictions for 2012.


Record keepers

Of the 40 or so national record keepers, less than 25 providers are viable as stand-alone businesses. Some providers survive either because the parent company is asleep at the wheel or there are strategic reasons to maintain their record keeping divisions. Incumbents are unwilling to pay premium prices to buy second-tier competitors, but it appears that private equity firms value record keepers higher, especially if they are pursuing a roll-up strategy or see a new way to leverage technology. Although price compression in our industry will continue, so too will cost reductions, though perhaps at the cost of innovation for some firms.



DCiOs are the group least affected by price compression and shrinking margins in the DC market, but active managers in general will continue to strive to show their value vis-à-vis passive funds, the market share of which will continue to increase, especially as the building blocks of low cost asset allocation funds. Target-date funds, especially propriety lineups, continue to shrink the pool of assets available while at the same time many broker-dealer partners are demanding greater payments without appreciably increasing value.


Broker dealers

With increasing oversight and reporting required by the regulators, many firms that were reluctant to focus on the DC market will have further reason to withdraw. Though forced to comply even if they have a few DC advisers, it's unlikely that the pool of just 35 or so broker dealers with at least one person focused on DC plans will increase. Though IRA rollovers and retirement income hold great promise, if future regulations restrict advisers from working with participants, then leveraging rollover opportunities within a DC plan becomes infinitely more complex.


Plan sponsors and participants

Employers continue to step up their focus on finding an experienced DC adviser, which will be only increase with 408(b)(2) disclosures vis-à-vis record keeping change. Will the participant fee disclosures cause more of them to be proactive, pushing employers and advisers to step up their game?



Though advisers are the key drivers for small and mid-sized DC plans, most struggle to gain access to or own the resources required to manage the plans and improve participant outcomes. Forward-looking advisers are building integrated systems or virtual back offices in partnership with providers and broker dealers. With FINRA's limited understanding and risk-avoidance mindset concerning the use of technology - especially social media - to market services, many advisers will continue to pursue the pure RIA model, which the DC world is embracing. While favorable participant outcomes is the goal, profitable practices are the means to that end, forcing advisers to become better entrepreneurs and pushing them into larger groups such as a collection of DC advisers or part of a benefits, P&C or wealth management practice. Price compression is occurring at an alarming rate, especially for mid- and large-market advisers. This is being fueled by the new disclosure regulations, further forcing economies of scale and more strategic business models. Finally, almost all DC advisers will be acting as fiduciaries, though some may partner with third parties like Morningstar and Mesirow to limit liability.

Reach Barstein at fred.barstein@TRAUniv.com.

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