FRC Predicts Regulations Will Squeeze Profits

“Overall, we believe that plan-level profits are likely to be squeezed across most stakeholders,” said Leslie Prescott, author of the FRC study, “Trends in Retirement/401(k) Plans and Administration.” “Prospects for growth exist for firms that understand the current market dynamics and position their organization to take advantage of these developments.”   

The study findings are based on FRC’s assessment of the five major trends and four strategic issues affecting the DC industry. The report provides outlooks and key takeaways regarding these trends for asset managers, advisers, and recordkeepers. The report focuses primarily on 401(k) plans, but also includes selective coverage of 403(b) plans.   

According to FRC’s analysis, DC plans comprised approximately $4.5 trillion in assets at the end of 2010. Industry sources estimate that there were 49 million participants in 401(k) plans at the end of 2009.   

As part of the report, FRC’s analyzed information from BrightScope’s retirement plan database. This analysis revealed that total plan participant costs as a percentage of assets vary significantly with plan size, and the average participant-paid costs as a percentage of assets for the smallest plan groups was more than three times those of the very largest plans. “This shows the impact of scale on the business,” said Prescott. “In our analysis we also saw cost disparities where comparably-sized plans within an industry often had substantial differences in the actual dollar amount of annual fees that a participant would pay, amounting to hundreds and even thousands of dollars a year. The spotlight on plan costs is causing plan sponsors to seek out and use benchmark data more frequently to uncover opportunities to reduce plan costs, often through plan redesign or change in plan providers.”  

The FRC report also finds that impending requirements for improved fee disclosure are driving plan sponsors to investigate different investment vehicles as the understanding of total fees being paid for the management of DC plan assets increases among plan sponsors and participants, creating the likelihood of demands for cost reductions. As Prescott points out: "Both the total amount of plan fees as well as the clarity of the fees are expected to create openings for a wider variety of investment structures beyond basic non-institutional class mutual funds. We're seeing innovation and competition among investment vehicles providing an unprecedented number of low-cost in-plan options. For example ETFs are moving into plans, and fully-indexed target-date funds have captured 27% of target-date mutual fund assets."   

FRC sees regulatory forces, along with economic factors, heightening competition among recordkeepers of all types and sizes, and across all plan sponsor segments. "We're witnessing a variety of strategic approaches being made by competitors in efforts to gain scale, which is critical to profitability in this business," commented Prescott. "According to FRC's analysis, the independent recordkeepers who hold 15% of defined contribution plan assets likely will face the greatest pressure."   

"As always, change leads to both opportunities and challenge," Prescott concluded. "With more information available about the costs of their plans to plan sponsors and participants, plans of all sizes will soon be able to evaluate plan management in a way only the largest plan sponsor could before. Asset managers, advisors, and recordkeepers must take stock of their own situations and will need to develop fitting strategies to achieve success as the industry moves into a post-fee disclosure era."