Switch Rates in Micro Market Signal Opportunities

Open architecture and an uptick in the use of co-fiduciary services are changing the landscape for investment firms, according to Retirement Research Inc.

Both trends fit the context of a greater focus on fiduciary responsibility, according to John Guido, principal of Retirement Research, which explores trends in a new report, “Retirement Markets 2014.”

The adviser’s business model and services continue to evolve, Guido tells PLANADVISER. The report shows growth opportunities clearly continue in the micro end of the market, he says. Turnover in plans looking to change administration or the adviser is rising. “The switch rates for companies with an existing plan are in the high single digits, 7% or 8%,” Guido says, “back to where they were pre-recession.”

A healthy market and healthy investment results have driven asset growth, according to the report. While plan formation and participant growth were modest, turnover rates have bounced back. Especially in the small and middle markets, turnover is obviously the source of a majority of sales opportunities.

The adviser market also has undergone some considerable change, Guido says. “Today, retirement-centric advisers, those with 60% or more of their business focused on retirement, represent about 24% of all advisers,” he says. These advisers manage 55% of the retirement-related assets, and are moving more from a commission-only model to fee-based or hybrid model, often with a dual registration that allows an adviser to operate both a fee- and a commission-based practice.

“The data tells you there are more folks that have converted their business for a greater retirement focus,” Guido says. “They’re meeting plan sponsors’ need.” These changes really come on the heels of expanded fee disclosure, he feels. “The definition of fiduciary hasn’t changed, but plan sponsors have a heightened awareness of their fiduciary responsibilities,” he says. 

As a logical next step, plan sponsors increasingly look for advisers who are well educated in the retirement business, he says, who can assist with everything from vendor selection to monitoring the health of a plan.

Advisers as Fiduciaries

“Being an adviser means really being a partner,” Guido says. Interestingly, he says, since 2005, the number of retirement-centric advisers who consider themselves a fiduciary has increased 25%. In 2005, about half of advisers surveyed saw themselves as a fiduciary to the plan. Today, that number is closer to 80%.  

Fee disclosure, the report contends, created increasing downward pressure on fees and a greater reliance on advisers to provide fiduciary support. As advisers become more concentrated in retirement, Retirement Research predicts continued scrutiny on fees, and demand for low and no-load investment options is likely to rise.

Guido says the number of plan sponsors taking advantage of co-fiduciary services, such as those adopting 3(21) arrangements, has risen in the last few years. The data shows that nearly two-thirds of plans (68%) are currently covered by a 3(21) service. Of those plans, two-thirds use an adviser to provide the service. The remaining third use another third party. About 25% of plans use 3(38) services. “Advisers have been responding to this need for help with fiduciary service,” Guido says.

Of the firms Retirement Research profiles—which Guido describes as “the biggest of the major players”— 65% offer an open architecture fund platform. The increase is driven by plan sponsors’ growing concern with fiduciary responsibility, he says, which advisers meet by tweaking their business model, and vendors meet by providing an open selection of investments.

The last key factor is growing focus by providers on plan health reporting. “Providers are ahead of the curve on this,” Guido says, with many creating reporting mechanisms that are customizable for plan sponsors. Advisers can use this capability to show a plan sponsor what is going on with investments, participation, diversification of investments—all the factors that help determine the health of a plan.

“How retirement ready are we making these participants? That’s what it’s all about,” Guido observes. After identifying issues in a plan, the adviser can peer rate the plan and suggest strategies to improve those areas of the plan.  

Regulation around fee disclosure transformed both the market and how providers service it. Advisers have been ahead of the market, Guido feels, in anticipating needs of plan sponsors and meeting the challenge of greater fiduciary responsibility. The growth of open architecture and use of fiduciary services have made it easier for advisers to do what they need to do, he says, and made them more effective.

The “Retirement Markets 2014” report is available for purchase here.