Insurance Firms Locking Up More of 401(k) Market

Reaping the rewards of their success in meeting plan sponsors’ expectations about installation and ongoing service support, insurance companies have captured a larger share of the small to mid-size, adviser-driven 401(k) market.

This was the primary conclusion of a new study by Hynes Associates, a research firm specializing in retirement and investment issues, according to a news release.

Group annuity-based products offered by insurers made up an average 44% of new 2006 retirement plan sales in the adviser channels, continuing a rising trend, compared to 56% accounted for by mutual funds, the study showed.

Dawn Hynes, president of Hynes Associates, said a clear trend observed in interviews for the study was the emergence of a registered investment adviser (RIA) approach designed to address mounting plan sponsor concerns about their fiduciary liability stemming from 401(k) plans.

The news release said this approach typically comprises an independent daily valuation recordkeeping platform offered with an open-architecture universe of investment options.

“The RIA approach does address the key issues of fee transparency and investment flexibility,” said Hynes, in the news release. “However, a consequence of lower fees under this method is the loss of many layers of participant and client service supports such as onsite enrollment resources. While this may not matter for larger plans in the $10 million to $25 million range, the trend by broker-dealers to adopt the RIA method in smaller plans under $10 million may lead it to crash and burn. These plans need intense, high-touch service models.”

The study noted that retirement plans with less than $10 million in assets constitute nearly 80% of total annual new sales across broker-dealer channels, increasing pressure to adopt the RIA method in this category. According to Hynes, this explains why broker-dealers are turning to insurers who, they say, have all the necessary operational capabilities to “hard-dollar” bill for fees and have long experience working with multiple, diverse fund families.

“Many of the broker-dealers we interviewed believe that insurers are best positioned to function in an RIA capacity,”  Hynes asserted. “Further, they demonstrate the long-term staying power that broker-dealers are looking for in a partner as part of the due diligence process attached to provider selection.”

Hynes Associates is a market research firm conducting in-depth analysis of retirement and investment issues. The study encompassed more than 30 broker-dealer firms managing over $300 billion in total retirement plan assets, with more than 120,000 advisers and in excess of $50 billion annually in new 401(k) sales.

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