Defined contribution retirement programs have seen rapid expansion over the past decade. But, defined contribution business will be undergoing a slowdown, as alternative investment options increase, market returns decline, and retiring baby-boomers begin to remove assets, according to a study released last week by Strategic Insight, a mutual fund research and consulting company in New York, and NewRiver, an online financial service provider in Andover, Mass.
The 200-page report, "The Defined Contribution Market: Strategies and Opportunities for an Evolving Future," is the most comprehensive study on the defined contribution market in over a decade, according to the companies. The report discusses mutual fund growth in defined contribution plans and challenges companies in the defined contribution market have to contend with, and recommends strategies for mutual fund companies, distributors, and other financial service organizations. The two companies collaborated on the project for about six months, according to Avi Nachmany, director of research at Strategic Insight.
Defined contribution retirement programs have grown dramatically since 1992, especially in the realm of mutual funds. Roughly $60 billion in assets flowed into mutual funds in 2000 through those plans, the largest amount ever in a single year, according to the study. At the end of 2000, total defined contribution plan assets in mutual funds and variable annuities was over $1.2 trillion. That represented 19 percent of total fund assets, up from 15 percent in 1994, according to the study. Furthermore, the percentage of total defined contribution assets in mutual funds has increased every year for the past 10 and is currently at about 46 percent, according to the report.
Last year, the top five investment managers in terms of assets in defined contribution plans - Fidelity Investments of Boston, the Vanguard Group of Malvern, Pa., American Funds of Los Angeles, Putnam Investments of Boston, and Janus of Denver - had inflows of $40 billion through defined contribution plans, bringing total defined contribution assets managed by those firms to nearly $570 billion, according to the report. Of the $37 billion in total assets that Janus gained last year, leading all other firms, 35 percent came from defined contribution plans, according to the report.
However, those numbers are likely to begin to decrease, according to the report. One reason is the weak market, according to Nachmany. Also, the number of investment alternatives is increasing, and at the same time the number of possible plan participants is decreasing, according to the report.
"Participation rates have peaked and the rate of growth of new workers eligible to participate is expected to drop," Strategic Insight said in a statement. "As baby-boomer workers retire, their assets will begin to leave the DC market through both rollovers and distributions."
More significant than the potential slowdown in defined contribution assets is the accelerating pace of change in the nature of defined contribution plans themselves, which is mostly technologically driven, according to Nachmany.
Technology is affecting almost every aspect of the defined contribution business today, including online advice, record keeping, multi-account aggregation, digital compliance, and paperless delivery, according to the report. Adapting successfully to these technological changes will be the most important step a firm can take to counter the predicted slowdown, according to the report.
"The sheer scope of technological and structural change is impacting virtually every DC organization," said Darlene DeRemer, managing director of eBusiness Advisory Services at NewRiver. "Technology solutions are providing the key innovations that are helping companies to keep growing and stay competitive in this business. By engaging technology and the Internet, providers are now able to serve previously unprofitable segments, such as small company plans."