The 401(k) market is maturing.
Plan sponsors are waking up, most advisers are now
forced to act as fiduciaries and lawsuits are
likely to move down market to smaller retirement plans. Broker-dealers are more risk-sensitive due to the Department of Labor's fiduciary rule, and record keepers and asset managers are looking for ways to be more efficient (meaning they are likely to focus their attention on experienced plan advisers).
This is all a way of saying advisers of defined contribution plans have to adjust and evolve. Here are what I see as the biggest threats and opportunities facing plan advisers over the next three years.
Threats:
• Declining fees. With clients hyper-focused on fees, coupled with their demand for more services, advisers face tough choices. One is to keep lowering fees and try to find ways to become more efficient. The other is to hold steady or even increase fees, which means they must show value by moving beyond the "Triple Fs":
fees, funds and fiduciary guidance.
• Record keepers. In the fight for individual retirement account rollovers and other opportunities to cross-sell retirement plan participants, some record keepers are
willing to take on fiduciary responsibility and act as an adviser. Some record keepers believe they will be considered a fiduciary anyway under the DOL's conflict-of-interest rule, so why not get paid to do it?
• Succession planning. Do advisers have a practice or a business? If only a practice, which requires their constant attention and presence, it is worth less. Though some have saved for retirement, many advisers expect to retire on the proceeds of the sale of their business, which puts their retirement planning at risk if they do not have a viable succession plan.
• Next-generation advisers. To leverage their knowledge, brand and fixed costs as well as increase the value of their practice through viable successors, advisers have to bring in new advisers. But it's getting harder to attract young people to the profession and most advisers have little time, experience or resources to train new ones.
• New entrants. With around $7 trillion in DC assets and more in IRAs, will new entrants beyond the current crop of robo-advisers, such as Google, Facebook or startups like Acorns, be attracted to the retirement market? They are more savvy marketers, especially on social media, and they know how to leverage big data and technology.
Opportunities:
• Improving outcomes. If given the chance, savvy plan advisers must find ways to improve the income replacement ratios of plan participants. This could combat their No. 1 threat (declining fees) by showing value. The first step here is to prove why senior management at employers should care about improving their retirement plan and their employees' income replacement ratios.
• Plan design. Experienced plan advisers might think automatic enrollment, auto-escalation, stretch matching, and target-date funds (or other professionally managed investments that serve as a qualified default investment) are passé, but they are not to small and midsized plan sponsors. The "auto plan" is an easy way to improve outcomes and show value when combatting declining fees.
• Participant engagement. Though it's hard to engage plan participants, "there's gold in them thar hills!" as they say. Beyond rollovers and wealth management, plan advisers have unique opportunities to sell services such as health savings accounts, identity theft protection like LifeLock and insurance products.
• Pooled employer plans. Unaffiliated companies cannot join traditional multiple employer plans and pool their retirement assets, but legislation or even rules promulgated by the DOL could change that. This is an opportunity for elite and even "core" (or, midlevel) plan advisers
to be able to work with smaller plans, which have higher margins.
• Collective investment trust funds. Larger adviser groups are pooling resources to
create custom CITs that have lower cost because of deals they cut with money managers. This yields additional revenue or even the ability to hold or increase their own fees while keeping plan expenses the same.
Both threats and opportunities:
• DOL fiduciary rule. On the one hand, most elite and core advisers are already acting as fee-based fiduciary advisers and
stand to pick up plans from advisers who exit the market. On the other hand, if everybody is a fee-based fiduciary, then advisers will have to move beyond the "Triple Fs" to hold fees and show value.
• Technology. Savvy advisers are leveraging robo-advisers and other technology to improve efficiencies. But some advisers don't have the capital or experience to properly use technology, and robo-advisers touting low fees could cut into margins or steal clients.
• RIA aggregators. As advisers' practices grow, they become attractive to aggregators that
want to buy their businesses or affiliate, providing them with tools, scale and brand. On the other hand, solo or ensemble practices not part of larger groups will struggle to compete.
• State retirement plans. Many states are mandating that companies of a certain size offer employees a retirement plan, potentially
flooding the market with new plans. But some state plans, which may be more competitive than those in the private marketplace, do not have room for an adviser and many advisers do not have the business model to handle the new, small plans that come to market.
• Litigation. Like it or not, lawsuits against DC plan sponsors have made them more aware and perhaps more likely to hire a qualified plan adviser. On the other hand, advisers
may become targets of these lawsuits.
Fred Barstein is the 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.
