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Bear Market Stalls Battle for DC Plans

A poor economy and rising unemployment rates are making an already difficult defined contribution market even harder for plan providers. Because plan sponsors are occupied with more pressing business concerns in a difficult economic environment, changing or adding a plan provider to their defined contribution plan is not a priority. That has made gaining market share very difficult for many 401(k) providers, say industry observers.

Those factors coupled with the fact that 401(k) assets shrank by $72 billion last year could spell another difficult year for 401(k) providers, said to Josh Dietch, a consultant with Cerulli Associates of Boston. However, it could be worse. While poor performance is eating away at existing assets, fund companies in the 401(k) business have a layer of insulation from the bear market, he said."The reason why they got into the 401(k) business is it annuitizes cash flow on funds," he said. Dietch estimates that plan participants have contributed approximately $40 billion in assets to defined contribution plans year to date, roughly the same amount they did the previous year.

But plan providers seeking to gain market share are having a tough time because most plan sponsors and brokers that distribute defined contribution plans are not trying to win new assets and are instead focusing on retaining the assets and clients that they have, Dietch said. "In this sort of market you are put into a reactive situation," he said. "I've talked with a lot of providers and sales aren't where they should be."

Trying to steal business from other plan providers is not an easy proposition in today's market environment, said John Cooper, director of retirement services for AIM Management Group of Houston. "From everybody that we've talked with, in general there are not a lot of changes [in providers] this year compared to past years," he said.

Winning new business is difficult since many plan sponsors do not want to switch their providers in the middle of a turbulent economy because they are concerned about locking in losses for their employees, he said.

Plus, the last thing plan sponsors are focusing on right now is defined-contribution programs because they are worried about strategic issues and weathering a tough economy, said David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America.

Rising unemployment is also playing a factor in keeping providers from winning new market share. In August, unemployment hit an almost four-year high of 4.9%, a figure not significant in terms of the overall economy, but high enough to tip the scales in favor of plan sponsors, not participants, Wray said. Top talent must still be wooed with a strong benefits program, but the "pressing demand" that plan sponsors were under to upgrade their investment programs is no longer there, he said. Much of the turnover in plan providers in recent years was the result of sponsors seeking an upgrade to their benefits packages to lure skilled employees, he said.

While there is little that providers can do to win gain market share in this type of economy, there is a lot they can do to position themselves strategically for when conditions turn around, said Cooper. AIM, which has about $20 billion in defined contribution plan assets, sells its retirement plans exclusively through brokers, he said. In AIM's case, it's offering its 401(k) producers education materials to help them explain to participants that they need to focus on the long term, he said. By and large, that message has worked and AIM has not suffered a huge outflow of assets, he said. "What we're trying to do is be there for them ... and help them help their clients," he said.

Plan providers selling directly to sponsors need to stop thinking about selling additional features and benefits and instead focus on figuring out how to help the sponsor run their business, said Wray. Informing the sponsor and its participants on how to process 401(k) loans and simply raising awareness of the services available to them goes a long way, he said. "The people that are willing to be helpful are likely to be the winners," he said.