Even as 401(k) record keepers have found ways to adapt to the reduction in revenue caused by ongoing and drastic fee compression in the retirement industry, other revenue threats loom from financial advisers and retirement-plan lawsuits, according to more than a dozen defined-contribution record-keeping executives attending a recent roundtable.
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Median fees for record-keeping, trust and custody services for DC plans fell by about half in the decade through 2017, according to most recent figures published by consulting firm NEPC. Median fees of $59 per participant in 2017 were down from $118 in 2006, when NEPC first conducted the study.
"I think everyone in this room has felt the margin pressure in the last decade and beyond," said Tom Woods, senior vice president at Fidelity Investments, which is the largest DC-plan record keeper with roughly $1.8 trillion, at the InvestmentNews Retirement Plan Adviser Record Keeping Think Tank.
The fee compression is a result of several things. Competition has driven record keepers to undercut each other on pricing, sometimes to an irrational degree, in order to win new business – a trend that, if it continues, could drive some firms out of business, executives said.
Retirement plan advisers have also pared back the roster of record keepers with whom they work. This trend will impact the revenue of record keepers with value propositions that don't resonate with advisers, according to Sandra McCarthy, the president of OneAmerica Retirement Services.
Firms also have been squeezed by declining fees for asset management, since most record keepers serve as a distribution outlet for their parent company's in-house investments. Equity mutual fund fees in 401(k) plans dropped to an average 0.46% from 0.65% during the 2009-2016 period, according to statistics published in June by the Investment Company Institute and BrightScope Inc.
At the same time, 401(k) plan sponsors and advisers have been using fewer of their record keepers' proprietary investment funds due to fiduciary concerns. According to the consulting firm Callan, the number of DC plans offering their record keeper's target-date fund dropped to 25% in 2018 from more than 50% in 2012.
Complicating these fee pressures, according to executives, is the increasing re-investment that record keepers have to make in their businesses for things such as cybersecurity, new regulation, financial wellness and other products necessary to compete.
Record keepers are "looking for ancillary ways to extend [their] value and look for other revenue sources," according to Jerry Patterson, senior vice president of retirement and income solutions at Principal Financial Group.
Fee compression is also forcing record keepers to better prioritize their business investments.
"This compression forces us to be really laser-focused on making sure that we prove that there's value to what we offer the customer," said Patrick Murphy, CEO of John Hancock Retirement Plan Services.
Record keepers have also been consolidating in order to gain scale and spread costs over a larger pool of participants. Some don't think that consolidation necessarily helps record keepers to compete, though.
"Scale isn't just getting bigger or doubling your participant base – it gets down to managing expenses, which is one of the most challenging things that everybody has to do in this room," said Bob Carroll, head of workplace distribution at Massachusetts Mutual Life Insurance Co. "Expense management is what makes this business work."
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Some said fee pressures may even ease up in the near future due to cybersecurity, said Tim Rouse, executive director of the SPARK Institute, a retirement industry trade group.
"The light at the end of the tunnel may in fact be linked to the cybersecurity issue because the Department of Labor, as well as even potentially Congress." Mr. Rouse said.
That means advisers and plan sponsors could eventually pick a record keeper based on stronger cybersecurity capabilities rather fees, he said.
Threats loom, however. For one, broker-dealers are beginning to branch into financial wellness and compete with record keepers, said Denise Diana, head of client management at Envestnet Retirement Solutions, which was an event sponsor.
"Now we have competing parts of the ecosystems around financial wellness and everybody's going to have make some hard choices around that," Ms. Diana said.
Retirement plan lawsuits also pose a challenge, executives said.
Johns Hopkins University and Vanderbilt University settled respective lawsuits in recent months that said they must ensure their plan record keeper can't use participant data to cross-sell proprietary non-retirement-plan products and services such as insurance. That data includes contact information, account size, investment selection and retirement date.
The fear is that a court eventually rules such participant data to be a "plan asset" which would prohibit record keepers from using it to cross-sell.
"If a judge just says the plan sponsor and the participant own the data, period ... that's really where we get into a lot of trouble," Mr. Carroll said. "That's where I see the real risks."
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