A crisis is a terrible thing to waste

How the COVID-19 pandemic could change the 401(k) market

After the 2008-2009 financial meltdown, there were massive changes in the 401(k) and 403(b) industry. More wealth managers began to see the defined-contribution market as a hedge for their businesses as their individual clients pulled money out of the market.

They earned less from DC plans than from wealth management clients – with more liability. And DC assets, and therefore revenue, were down 40%. But people kept contributing to their DC accounts because of automatic deductions from payroll and because savers were reluctant to stop funding their retirement.

The financial crisis showed the value of professional management, with products such as target-date funds proving their mettle over investors’ homemade portfolios. And some, though not all, active managers fared better than index target-date funds. The crisis also highlighted the fact that target-date funds were not created equally, exposing 2010-vintage funds that were loaded with equities to boost returns and then fell below the indices.

Yes, plan sales dried up for a while. But retirement plan advisers used the crisis as an opportunity to reach out to clients and participants more than usual. RPAs prospected new plans where an adviser at worst had been absent, and at best had been silent during the crisis, dealing instead with wealth management clients.

In 2009, fewer advisers were able or willing to act as fiduciaries, which provided more opportunities to specialists. RPAs continued to focus on high fees, especially those charged by firms that only dabbled in DC plans.

After the crisis, there was a surge of wealth managers who began to focus on DC plans. Today’s elite RPAs – who were all blind squirrels at one point in their careers – saw their DC business blossom in part because of the longest bull run in history. And those plan participants who stayed the course saw great dividends.

What changes to the DC market can we expect as a result of the current crisis?

Much depends on the market fallout and economic impact. But it’s hard to imagine that we have seen the worst of it because businesses in many sectors, even beyond the obvious ones such as travel and energy, will be affected.

Here are a dozen predictions:

1. Active managers that have done a good job preparing for a downturn will see a resurgence as investors shy away from index strategies and active target-date fund managers that have taken too much risk.

2. More wealth managers who have been looking to expand to or enter the DC market will focus on DC plans as a hedge to their individual investor business.

3. The move to flat-fee payments will accelerate as a hedge against drastic market downturns. Yes, flat-fee advisers lose the upside when markets improve, but the argument that fees should rise with assets is getting harder to make.

4. The focus on participants will increase. Workers will have more money in the market than ever, and they will need guidance and advice. Because of that, RPAs who already have a participant advice model will benefit. That will also lead to more RPAs affiliating with or selling to aggregators. Further, wirehouses and broker-dealers that have been creating tools to serve participants will retain current advisers and even attract some specialists.

5. With more people working remotely during the crisis, many will continue to do so, at least part-time. As a result, there will be more opportunities to access and interact with them digitally.

6. Savvy advisory firms will hire younger advisers to act as financial coaches and mentors to participants, not just to help with retirement planning but with overall management of finances and benefits. The current “eat what you kill” cold-calling model is unattractive to most younger workers.

7. Specialists will take business from DC plan dabblers, especially from those who have grown during this historic bull market. Savvy dabblers who are not willing to focus on DC plans will either partner or sell their DC practice to specialists, while protecting their wealth management and IRA opportunities.

8. Managed accounts will expand dramatically, especially among older workers or anyone with a significant account balance. More plans will use managed accounts as their default.

9. More plans will use target-date funds. Currently, less than half of smaller employers offer them, according to the most recent Society for Human Resource Management benefits survey.

10. Benefits firms, which might not be hurt as much as those that charge asset-based fees, will continue to aggressively buy and build retirement practices. They might even look to start their own pooled-employer plans (PEPs) for their brokers.

11. PEPs will be more attractive to plans, regardless of size. There’s safety in numbers, and the desire to outsource work and liability will become more attractive as companies are forced to streamline all processes and cut costs.

12. Look for further consolidation. Money managers will buy up competitors, in line with Franklin Templeton’s recent acquisition of Legg Mason. At the same time, more money managers will look to participate in the even more attractive and sticky retirement market. Record =-keeper consolidation will also accelerate, as retirement plans move to RPA specialists, who will continue to inherit record keepers when they take over plans. Those specialists have the resources to consolidate their books of business or at least limit the record keepers they sell going forward.

A bonus prediction, and my personal favorite: There will be less handshaking.

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ Retirement Plan Adviser newsletter.