Not-for-Profit/Governmental DC Market an Opportunity for Advisers

The U.S. not-for-profit (NFP) and governmental defined contribution (DC) market is a strong source of future asset and revenue growth, according to new research from global analytics firm Cerulli Associates.

The not-for-profit (NFP)/governmental defined contribution (DC) segment represents approximately 8% of the total U.S. retirement market. This sector includes the Federal Thrift Savings Plan (TSP), 403(b), 457, and 401(a) markets. Total NFP/governmental DC plan assets are expected to grow at a compound annual growth rate (CAGR) of 7% to reach $2.4 trillion by 2020.

Nearly two-thirds of 403(b) plan sponsors engage an adviser or consultant, and survey results suggest that this number could be on the rise, according to the report, “U.S. Not-For-Profit & Governmental Defined Contribution Plans 2016: Addressing the 403(b), 457, and 401(a) Markets.” In the $25 million to $99 million and $100 million and greater plan asset segments, some plan sponsors intend to hire an adviser or consultant in the next 12 months. Cerulli recommends that advisers and consultants hoping to serve this market be prepared to demonstrate 403(b) plan-specific knowledge and not-for-profit expertise.

The 403(b) market is highly diverse and cannot be accurately portrayed in monolithic terms, Cerulli notes. Distribution, client service, and marketing strategies should be deliberately crafted on a segment-by-segment basis (i.e., Employee Retirement Income Security Act (ERISA)-covered 403(b) plans versus non-ERISA-covered 403(b) plans, private versus public organizations), and also by sector—health care, higher education, and K-12 schools. Success and credibility in the 403(b) market requires a thorough understanding of each segment’s defining characteristics.

The multi-vendor environment of the 403(b) market introduces many of the complications that make it such a distinct opportunity from corporate DC. In a 2016 Cerulli survey of 403(b) plan sponsors, more than half of respondents cite participants’ preference for having a choice among vendors as the primary reason for the arrangement. This concept of choice and degree of choice available to participants emerges as a divisive topic in the 403(b) market.

Cerulli is most bullish on the health care sector and higher education sector of the 403(b) market in terms of potential for asset growth and as sources of new business within the DC market. Conversely, given its multi-vendor structure and many idiosyncrasies, Cerulli believes the K-12 schools sector presents the greatest barriers to entry for providers and asset managers that do not currently participate in it and would require a significant upfront investment to pursue as a source of new business.

The 457 plan market divides into two primary categories: governmental 457(b) plans and non-governmental 457(b) and 457(f) plans. The governmental 457(b) market is the larger of the two as these plans are often associated with states or municipalities and sometimes function as an employee’s primary retirement savings vehicle. Acting as a provider for a state-sponsored 457 plan presents a significant asset-gathering opportunity, but the market is both competitive and complex. Operational requirements can be challenging, particularly as each state has different statutes that need to be followed, making a scalable approach difficult to achieve.

The 401(a) plan, also termed “401(a) money purchase plan,” may combine employer and employee contributions based on a set formula by the employer. Government organizations are primary users of the 401(a) plan type, which is typically offered as one of the employee’s mandatory retirement savings plan options (e.g., participate in the 401(a) or DB plan). A 401(a) plan is typically supplemented with optional retirement plans such as a 457 or 403(b) plan (depending on participant eligibility). Experience with this plan type is key to winning new governmental 401(a) plans.