Insurance companies that provide 401(k) record-keeping services have gained substantial market share among small and midsize retirement plans over the past few years.
Insurance companies are by far the most common type of record keeper for 401(k) plans, with roughly a 48% market share, which is a much greater portion than that of other providers, such as asset managers, banks, brokerage firms and "pure" record keepers — independent providers that offer only record keeping.
While insurers historically have been most prevalent among small plans, they made further inroads over 2012-15, according to the most recently available data from the Investment Company Institute and BrightScope Inc.
The largest uptick over that period was among 401(k) plans with between $10 million and $50 million, where insurers' market share grew a whopping 18 percentage points, to 57.2%.
Insurers' share also swelled roughly nine percentage points in the $1 million-$10 million, $50 million-$100 million and $100 million-$250 million segments.
Some retirement plan advisers attribute this trend partly to
market consolidation, the construction of their record-keeping platforms and an increasing appetite for the use of proprietary funds among smaller plans.
A large portion of mutual fund companies used to offer record-keeping services in the small market, but several have exited the business in response to
margin pressure and
consolidation, resulting in fewer small-market competitors, said Sean Deviney, the director of retirement plan consulting at Provenance Wealth Advisors.
"The void has really been picked up, I think, by some of those insurance companies and the payroll vendors," Mr. Deviney said.
Asset managers are the second most prevalent type of record keeper, with roughly a 31% market share, according to the ICI-BrightScope data. Since they are more concentrated in the large market, though, they control the most assets of any type of record keeper, at 54%.
Insurance companies historically have operated at the small end of the market, and they have platforms well-suited to this environment, Mr. Deviney said. Namely, their platforms tend to be "unbundled," meaning they allow plan sponsors to work with third-party administrators that offer services such as compliance testing.
Small plan sponsors tend to prefer the unbundled approach, as opposed to the typically "bundled" approach in the large market, Mr. Deviney said. More tax planning among small-business owners can lead to widely varying plan designs that drive tax efficiencies, hence the preference for a specialized shop to handle the plan compliance and administration, he said.
Matt Cosgriff, a retirement plan adviser at BerganKDV Wealth Management, also believes proprietary funds play a role.
Insurance companies often require the use of proprietary products like a stable-value fund when working with small record-keeping clients, he said. This allows them to offer record keeping at a lower cost since they can generate additional revenue from their investment products.
"Insurance companies are not as open-architecture as some other fund-agnostic providers are," Mr. Cosgriff said. "In the small-plan space, I think it lets them subsidize the cost a little bit more."
There has been increasing scrutiny of the use of proprietary funds, especially among larger plans, given the prevalence of
401(k) lawsuits that call the practice into question.
