Data & Research August 27, 2015

Pension Buy-Out Sales Hit Record in Q2

It is still a great time for DC plan advisers to enter the pension risk transfer market—with record Q2 sales of annuity buy-outs measured by LIMRA and a budding interest from small and mid-size plans.
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Sales of group pension buy-outs reached $3.8 billion in the second quarter of 2015—a record for second quarter sales dating back to the early 1990’s, according to a LIMRA Secure Retirement Institute sales survey.

Pension buy-out sales tend to be seasonal, with most of the activity occurring in the fourth quarter, LIMRA says. But, sales increased more than 700% in the second quarter of 2015 compared to the prior year, due in part to Kimberly-Clark’s group annuity conversion enacted June 1.

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Michael Ericson, research analyst for LIMRA Secure Retirement Institute, says there are clearly more plan sponsors looking to convert their pensions to group annuities. “We’ve seen a big increase in small and medium sized companies that are looking to convert their pensions,” he adds. “As a result, there is much more activity throughout the year, not just the fourth quarter.”

For the last five years, the first two quarters of the year have seen an upward trend of pension buy-out activity. In the first half of 2015, 107 plan sponsors converted their defined benefit (DB) pension plans into group annuity contracts. That tops the previous number of 95 contracts in the first half of 2012.

The number of contracts only tells part of the story, LIMRA says. In 2012, corporate giants General Motors and Verizon transferred group pension obligations to Prudential. Those two contracts resulted in a sales spike of $35.9 billion for that year. While two deals that big occurring in one year is an anomaly, a single “jumbo” deal can have a significant impact on annual pension buy-out sales.

While a DB pension plan adds equity to a company, years of low interest rates and increasing Pension Benefit Guarantee Corporation (PBGC) premiums have encouraged more companies to consider transferring their risk to an insurer by purchasing a group annuity. Currently, 11 financial services companies provide group annuity contracts for this market.

Data & Research August 27, 2015

Small 401(k) Plans and Big Opportunity

A big market with needs to match, the small 401(k) plan market is fragmented and lucrative.
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Providers and advisers looking to service small 401(k) plans with fewer than 500 employees could find what Celent calls a greenfield space with plenty of opportunity.

Small companies employ a third of the American workforce today, Celent observes, but their 401(k) plans, where they exist at all, are expensive, cumbersome to operate and skewed toward expensive funds.

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Firms like ForUsAll, Honest Dollar, DreamForward Financial, Capital One Investing ShareBuilder 401k, Employee Fiduciary, and Ubiquity Retirement + Savings (formerly The Online 401k) have responded to the dearth of adequate infrastructure in the small-plan space by rolling out automated platforms that streamline processes and eliminate back-office paperwork. Most crucially, these firms are driving down costs to the benefit of the participant and the small-business sponsor, who can now afford to access the flexibility (in terms of plan design and contribution levels) and tax benefits intrinsic to the 401(k).

Celent points to the factors—regulatory reform that is weighing on traditional compensation and fee structures, the increase of working-age Millennials and rising interest in investments that address retirement income—that are changing how 401(k) plans are delivered to these smaller firms. “Nimble and digitally focused firms are staking claims to this lucrative and fragmented market,” the consulting firm says in “Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors.”

NEXT: Plan services and administration move downstream.

The report explores how a new generation of plan providers is making 401(k) administration less painful and more cost-effective for smaller companies, providing them access to services previously reserved for much larger firms.

Small providers will get a tailwind from the imposition by the Department of Labor (DOL) of a uniform fiduciary standard, with the fee transparency that entails. The entrance into the workforce of Millennials, whose self-directed but advice-friendly mindset aligns closely with the tech-driven model propagated by the new generation of providers, represents another potential inflection point.

“Once participants realize the extent to which they are being dunned of their retirement savings, some may change jobs; others will spur their employers to explore new provider options. The voices of these participants will echo loudest at the small end of the market,” says William Trout, senior analyst and author of the report.

The report, third in a retirement investment series, examines why small plans can be so expensive; the advantages of the 401(k) plan over other types of defined contribution plans and the offerings of new plan providers. A detailed comparison of six new providers of small plans—Ubiquity Retirement + Savings, ForUsAll, Honest Dollar, Dream Forward Financial, Employee Fiduciary, Capital One InvestingSharebuilder401k—outlines their key features, investment offerings and fees. A previous report looked at how advisers can better serve plan participants.

More information about “Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors” is on Celent’s website.

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