Opportunities Abound for Advisers in Distribution Marketplace

Financial advisers will have many opportunities to win rollover dollars away from retirement plan providers as outflows from 401(k) plans increase and traditional plan providers do not have the retail experience necessary to capture them, a new report says.

A recent report by Cerulli Associates, “State of the 401(k) Marketplace” says that advisers, especially the traditional wirehouse broker/dealers (B/Ds) have the brand, product, marketing cachet, and advice giving resources to keep gaining share of the rollover market. For retirement plan providers to keep up, they must develop their retail strength, Cerulli notes.

According to the report, the 401(k) market is mature and has many complex arrangements of distribution, service, and product, much of which is commoditized, making it difficult to discern the differences between programs offered by different providers. Further, many product innovations that come to market are copied quickly and slapped onto 401(k) offerings without much thought to better marketing, packaging, and delivery, the report says. The commoditization of the industry makes it more difficult for providers to make profits off of these programs. In fact, the report says that “fee compression is a certain and unstoppable trend in the 401(k) industry.” The most important revenue generators cited by 401(k) providers are targeted education to participants on asset diversification, plan participation, and deferral savings. Moving forward, retirement plan providers will need to generate revenue while retaining plans and their assets to remain competitive in the marketplace.

Retirement Advisers


Advisers who specialize in retirement plans, and can address fiduciary concerns and consult on plan design are in high demand in today’s environment. These specialists are able to differentiate a complex array of product, features, and separate pricing scenarios from nearly every provider. Most B/Ds have realized this and are encouraging the creation of groups of retirement plan adviser specialists, who generate the majority of their income from the sale of retirement plans. Business drivers for B/Ds and advisers include: selling to the sponsor, fiduciary role, brand importance of the provider, product choices and plan feature complexity, and revenue and profit potential.

The small/mid market is a good area for retirement specialists; in fact, Cerulli notes that “the days of one-hit wonders making hay in this market segment are long over.” Moving forward, Cerulli predicts there will be opportunity especially in the $6 million to $10 million plan size range, because plan sponsors in this area will need increased fiduciary oversight as they move up-market to increased product offerings.

Cerulli’s report noted that consortiums of advisers who specialize in selling and servicing 401(k) plans have formed, which leads to benefits for both advisers and providers. Advisers benefit by being able to leverage strengths across broader retirement specialist platforms and reach into a bigger pool of capital to grow business and make money. Providers are able to benefit because the specialists become predisposed to using certain providers.


The Marketplace


At the end of 2005, the retirement industry had $13.3 trillion in total assets; the defined contribution (DC) and IRA components totaled $3.8 trillion and $3.9 trillion, respectively. Unfortunately, although there will continue to be a steady rise in active retirement plan participants, especially with the increase in automatic enrollment expected as a result of the PPA, the Baby Boomers’ retirement will lead to them all moving money out of their savings plans and the DC segment will therefore see net flows in negative territory for many years to come, Cerulli says. In fact, Cerulli predicts that by 2007, outflows from 401(k) plans will reach nearly $300 billion and widen thereafter by upwards of 15% each year.

Cerulli identifies a core set of nine business drivers that profoundly affect all providers in this industry, which include: technology delivery, revenue and profit potential, use of outsourcing, consolidation activity, regulatory impact, rollover/retirement income focus, service and support platform, and cost of total benefits integration/healthcare. These drivers affect all providers but play out differently in each major market segment (micro, small/mid, and large). When providers were asked to define their selling markets, two-thirds segmented their markets by plan assets and almost half of them designated their markets by employer size. The Small/Mid market is the most challenging arena for providers, according to Cerulli, who says that nearly 10% of that market is shopping for a new provider in a given year.

Of the providers serving this marketplace, the top 10 firms control nearly 75% of the marketplace for DC assets while the top 20 control 88% of the market. There has also been some consolidation in the marketplace, driven by a desire for a company to generate scale, grow marketshare, and enter new markets. Although the majority of the marketplace is controlled by a small group of firms, there are, and will be, takeover opportunities for advisory firms to take control of those assets, Cerulli says.

Moving Forward


Now, the engine of growth for retirement plan providers is the distribution phase, as the Baby Boomers move their money out of retirement plans. “Today, the predominant means for employers to review and initiate relationships with 401(k) providers involves the use of some form of intermediary/distributor,” Cerulli says. The greatest opportunity in the 401(k) marketplace, according to providers surveyed by Cerulli, is building and enhancing strategic distribution alliances. Providers predict that dedicated wholesaling will be the best way to provide value to B/D channels and also predict that, because of the need for recognition in the marketplace, there will be a moderate to significant increase in the marketing budget for the B/D channel. “In a market that is becoming increasingly a takeover business, protecting a provider’s 401(k) franchise is the most important method for meeting profit objectives.”

Cerulli predicts that end-to-end solutions packaged in a simple, straightforward but yet resonating way will be the model of the future. “Each unique and successful model in these segments…meet[s] the needs of their customers while also building a wall around them to protect from poaching via other providers.’ According to the report, the automation trends in 401(k) programs, such as the push towards automatic enrollment in the Pension Protection Act (PPA), will drive toward a non-customized, off the rack, best-of-breed program model.