Expectations of Offerings, Service in 401(k) Plans on the Rise
November 6, 2006
Administrators of 401(k) plans have been strategizing to decide what products to offer and how to capture Baby Boomers assets. According to a new report from Cerulli Associates of Boston, 401(k) providers should consider nine factors: revenue profit potential, outsourcing, technology, customer needs, service and support platforms, consolidation activity, regulatory impacts, rollovers and retirement income, and the cost of total benefits integration.
The report, "The State of the 401(k) Marketplace: Evolving Provider Models," was based on interviews with 20 top providers and broker/dealer executives, rounded out with an online survey.
At the end of last year, retirement plans had $13.3 trillion in total assets. The IRA marketplace captured $3.9 trillion of that total, while defined contribution plans, including 401(k)s, had $3.8 trillion. The top 10 firms control nearly 75% of defined contribution assets, while the top 20 control 88%.
As a result of this concentration of assets by the industry's largest firms, sponsors and participants have come to expect greater service from 401(k) administrators. "The 401(k) provider role is changing, and they will be thought of less as recordkeepers and more as a systematic support system," noted Tom Modestino, senior analyst and author of the report.
Today's 401(k) administrator must offer a high level of customer service and technology support, he noted.
While the 401(k) marketplace has been a lucrative business thus far, sponsors' and intermediaries' increasing scrutiny of fees could challenge revenue and margins. The opening of the magic box of pricing is going to occur even more commonly, Modestino predicted. "Sponsors are becoming savvier on how providers make money and are negotiating better deals," he said.
To remain profitable, plan providers will also have to do a better job of retaining sponsors' business and of encouraging participants to increase contribution levels, Modestino added.
Regulations will affect the market from a business process standpoint, some legislation more so than others. The Pension Protection Act of 2006 has paved the way for automatic enrollment. On the other hand, regulations such as redemption fees designed to squash mutual fund market-timing activity have little payoff for companies other than an increased workload and costs, with no benefit of additional revenue.
Technology systems are evolving from simple legacy systems to web-enabled platforms with straight-though-processing efficiencies, the report states. Providers spend an estimated $20 million a year on technology.
The future of technology in the 401(k) area is comparable to Apple's invention of the iPod, Cerulli states. Music lovers can't imagine not having an iPod, Modestino said. "The 401(k) industry is moving in a similar direction, and technology will mainstream the needs of 401(k) participants." Providers will offer an end-to-end solution from accumulation, complete with advice, to distrbitution, with such services as systematic withdrawals, he said.
The area of total retirement outsourcing, combining 401(k) and defined benefit plans in one account, is expected to grow, as more firms look to extend revenue beyond the 401(k) arena.
Healthcare options will also drive change in the marketplace as providers begin offering participants a health savings account (HSA), similar to a 401(k) account. The tax-favored, tax-free withdrawals are only allowed to cover uninsured medical expenses. "The concept is interesting and different, in a commoditized industry," Modestino said, predicting HSAs could attract $75 billion in new money with individual accounts averaging $3,500.
Outsourcing will continue as firms try to have a presence in all markets and segments. Companies are really stretching their internal abilities, and they cannot do everything in house. Providers considering new areas of business to tackle will consider outsourcing the back-office work. The question that looms is to build or buy the necessary capabilities to compete and deliver services effectively, and providers are looking to outsource solutions to meet these needs, according to the Cerulli report.
Building scale in the industry is a key motivation for many providers, and as seen with Wachovia acquiring Ameriprise's book of business, there will be further consolidation in the market. Firms want to enter new product markets, but need the ability to widen scale and require a profitable book of business.
"The 401(k) market is a tough business to break into, and the large companies with established positions are intensely focusing on investing a lot of money to remain major players in the market," said David Wray, president of the 401(k)/Profit Sharing Council in Washington.
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