Continued scrutiny by regulators and legislators on the fees and outcomes of 401(k)s and other defined contribution plans is pressuring revenues at asset managers, advisers and recordkeepers and will shape the future of the DC retirement plan market, according to a new study from
“Overall, we believe that plan-level profits are likely to be squeezed across most stakeholders,” said Lesie Prescott, author of the study. “Prospects for growth exist for firms that understand the current market dynamics and position their organization to take advantage of these developments.”
DC plans held $4.5 trillion in assets for 49 million participants at the end of 2010, FRC estimates.
“Government regulations have had a profound and varied effect on DC plans and administrators,” Prescott said. “For example, the Revenue Act of 1978 essentially launched the industry, and the Pension Protection Act fueled the incredible growth in target-date funds. Currently, as a result of impending fee disclosure requirements, as well as high-profile press coverage and evolving economics, plan sponsors are focusing on total plan costs and how they can be reduced. Enhanced fee information is becoming available to plan participants, and there is heightening competition among recordkeeps of all types and sizes.”
FRC also said that larger plans tend to have lower costs and that among small plans, the cost can be three times as much as at larger plans.
“This shows the impact of scale on the business,” Prescott continued. “In our analysis, we also saw cost disparities [among] comparably-sized plans within an industry amounting to hundreds and even thousands of dollars a year. The spotlight on plan costs is causing plan sponsors to seek out and use benchmark data more frequently to uncover opportunities to reduce plan costs, often through plan redesign or change in plan providers.”
Some plans may even decide to offer instruments other than mutual funds, Prescott said. “Both the total amount of plan fees as well as the clarity of the fees are expected to create openings for a wider variety of investment structures beyond basic non-institutional class mutual funds.” For example, plans are beginning to offer ETFs, and fully indexed target-date funds have captured 27% of target-date mutual fund assets.
FRC also believes that recordkeepers with the largest scale will benefit in the new competitive landscape, and the independent recordkeepers, which hold 15% of defined contribution plan assets, will face the greatest pressure.
“With more information available about the costs of their plans to plan sponsors and participants, plans of all sizes will soon bee able to evaluate plan management in a way only the largest plan sponsors could before,” Prescott said. “Asset managers, advises and recordkeepers must take stock of their own situations and will need to develop fitting strategies to achieve success as the industry moves into a post-fee disclosure era.”
