The entire defined-contribution industry is in flux as retirement planning becomes more important. Plan sponsors are paying more attention to their DC plans, putting pressure on advisers to deliver real value while demanding lower costs. Here are the 10 biggest threats facing retirement plan advisers over the next three years.
1. Technology. Coming soon to a defined-contribution plan near you is the full use of technology and artificial intelligence. Advisers able to leverage technology to help plan sponsors manage their plan and engage with participants, and to run their own practice will lap those that do not. It takes time and capital, which is often lacking for advisers.
2. Declining fees. The DC industry has done a great job of making plan sponsors hypersensitive about fees, which has contributed to an alarming decline in advisory fees. Advisers need to change fee structures to focus on activity and results, rather than asset-based fees, to highlight the value of their services. Remember: Fees without value are always high.
3. Record keepers. There is a fight looming between retirement plan advisers, registered investment advisers and broker-dealers with record keepers over participant data, such as age, salary and contribution rate. Who owns what? Open multiple employer plans — known as open MEPs — will offer record keepers greater opportunities to sell directly through associations and affinity groups. Record keepers are demanding more marketing support from asset managers, with the move to clean shares — and the resulting dip in revenue-sharing fees — leaving less support for advisers.
4. "Triple F" services. Advisers who focus on fees, funds and fiduciary services and charge an asset-based fee are under siege by robo-fiduciaries and emerging retirement plan advisers. They need to morph into OCROs (outsourced chief retirement officers), who act as a member of the client's retirement committee and take the lead in directing the activities of all other vendors.
5. Cybersecurity and privacy. Hackers are using DC plans and participants to access their accounts and penetrate company firewalls. While record keepers are more at risk than advisers, they have much greater resources. Information about plans and participants that's held by advisers needs to be protected, as does the privacy of the data overall. Unprepared advisers are at risk, as are their clients.
6. Regulators. Will the Securities and Exchange Commission come out with a new fiduciary standard? Will state fiduciary standards be superseded? Will state-run retirement plans limit opportunities for advisers? If the auto-plan is mandated by the federal government, does that minimize the role of advisers? The Department of Labor will likely start auditing more plan advisers; better have your act together and documentation ready.
7. Litigation. Lawsuits will likely ensnare advisers in their wide web as more and more attorneys get into the DC-plan litigation game. Even if the lawsuits are spurious, mounting a defense involves significant cost (and time). And lawsuits will probably increase with a big market downturn.
8. Convergence of retirement and benefits. Plan sponsors are likely to favor advisers that offer integrated retirement and benefit services and retirement plan advisers that are part of, or partner with, a benefits practice will have greater cross-selling opportunities.
9. Investor shift to index funds. Index funds don't just minimize the value of an adviser, they limit profit margins for asset managers — which could mean less support for advisers.
10. DCIOs. The entire DCIO — defined-contribution investment only — business is in crisis, as margins get thinner as a result of greater use of index strategies and more demand from record keepers, aggregators and advisers for support. Even firms with strong target-date and index franchises are feeling the pinch.
Yet it is foolhardy to ignore the DC market, which fuels individual retirement accounts and provides access to 90 million investors. Look for more DCIOs to distribute directly rather than through intermediaries, likely leveraging technology (see BlackRock and Microsoft) to access the millions of DC participants who cannot afford an adviser.