New research from Cerulli Associates finds that implementing and refining defined contribution (DC) plans in the public higher education sector could be a significant area of opportunity for experienced providers.
This is partly because of the overall shift away from defined benefit (DB) pensions in favor of DC, but also because the higher education sector is “beginning to adopt more 401(k)-like practices in terms of investment menu design, which may open it to providers and asset managers that have traditionally focused on corporate DC plans,” explains Jessica Sclafani, associate director at Cerulli.
Providers are targeting the market because of its unique characteristics, Cerulli finds: “The higher education sector of the not-for-profit DC market is considered attractive for a combination of reasons. The higher education component of the not-for-profit DC market has room for further vendor consolidation, in particular among large public organizations and some smaller private universities and colleges, which concentrates assets with a single provider.”
According to Cerulli, as of year-end 2014, the higher education sector of the non-profit/governmental DC market held the greatest percentage of 403(b) assets, clocking in at $393 billion, or roughly 44% of the market volume. Even more promising is the fact that, “unlike corporate DC plans, which have entered a period of negative net flows, not-for-profit (NFP) and governmental DC plans continue to increase their share of total U.S. retirement assets.”
There seems to be particular attention being paid in the marketplace to the idea of utilizing supplemental DC plans to achieve adequate retirement preparedness at the same time that DB pensions are getting significantly less generous. This high-level trend is opening up a variety of opportunities for advisers and providers to capitalize on their DC plan expertise to bring best-practice design to 403(b)s or other plan structures, Cerulli says.
“Given Cerulli’s expectations for continued growth, it may behoove asset managers and providers to re-evaluate their exposure to the 403(b) component of the DC market,” Sclafani adds. “Participants in 403(b) plans have considerable latitude in terms of their choice to enroll, their vendor selection, and their investment options, unlike 401(k) plans in which many of these decisions are automated for the participant.”
NEXT: More on the supplemental 457 and 403(b) DC market
Also promising, according to Cerulli, is that providers frequently work with higher education organizations on more than one DC plan type, because plan sponsors in the space typically view the various retirement plan structures as one holistic benefit program. For example, depending on a given school’s relationship with its home state, in addition to the DB pension and the 403(b) plan there could also be a 457 governmental plan structure, which will typically be offered to all employees or independent contractors—spelling additional opportunity for skilled providers.
Perhaps most important, the Cerulli research shows providers’ opinions are pretty well split about opportunity in these areas.
“The $4.7 trillion 401(k) market receives the majority of attention from providers, asset managers, and DC plan advisers/consultants, and is largely perceived as an evergreen opportunity to gather and grow institutional retirement assets, particularly in light of increasing pressures on corporate and public DB plans,” Sclafani says. “In contrast, when it comes to the $879 billion 403(b) segment of the DC market, some providers, and even more asset managers, articulate an attitude or culture that pretends the 403(b) segment ‘does not exist,’ ‘should not exist,’ or that it is ‘not an opportunity.’”
Such an outlook is probably short sighted, Cerulli warns.
“While the 401(k) market is a larger opportunity by assets (roughly five times the size of 403(b) assets), Cerulli research indicates that the 401(k) segment entered a period of negative net flows beginning in 2014, when distributions outpaced contributions by greater than $33 billion,” the research concludes. “In contrast, Cerulli projects the 403(b) market to experience positive net flows for the remainder of the decade. However, addressing opportunity in the 403(b) market requires a more thoughtful approach than simply repurposing 401(k) distribution campaigns and products for 403(b) plans. Because the 403(b) market is highly diverse, distribution, client service, and marketing strategies need to be deliberately crafted on a segment-by-segment basis.”
These findings and others are explored in-depth in the second quarter 2016 edition of The Cerulli Edge – Retirement Division. Information about obtaining the report is here.