Retirement Specialist Advisers Gaining Serious Clout

The influence of specialist advisers in the defined contribution (DC) market is “significant and growing,” says Jessica Sclafani, associate director at Cerulli Associates, “as evidenced by the consistent year-over-year rise in adviser-sold assets.”

From a top-level dollar perspective, recent Cerulli research finds nearly half of the $1.3 trillion adviser-sold DC market is controlled by advisers who qualify as retirement specialists. Despite what Cerulli calls “their powerful reach,” retirement specialists comprise only 5% of the total adviser population.

“Across dozens of Cerulli research interviews with senior executives in the DC industry, the retirement specialist adviser was almost unanimously identified as the primary sales target relative to the small- and mid-sized plan markets,” Sclafani explains. “When Cerulli analysts pressed for a definition of this adviser, however, it became clear the DC industry lacks a universal understanding.”

For Cerulli, a retirement specialist is as “an adviser who generates a minimum of 50% of total revenue from retirement plans.” Cerulli says this 50% income threshold is not the only factor for defining retirement specialists—in fact, some defined contribution investment only (DCIO) firms are also targeting the next generation of retirement specialist advisers who are not yet generating 50% of practice profits from retirement plans but who show a lot of promise for growth and innovation in the segment.  

Cerulli refers to this group as “emerging retirement specialists,” and recommends that all “DC providers and asset managers, even those that are satisfied with their current retirement specialist presence, build a strategy to identify, engage, and nurture the emerging retirement specialist adviser.” 

NEXT: What specialists do best 

Cerulli’s research shows retirement specialists have benefited nicely from equity market gains in recent years, especially during 2013 and 2014. Overall 401(k) assets grew 10% in 2014 to reach nearly $4.7 trillion—or 90% of the almost $5.2 trillion invested in total across private DC markets.

According to Cerulli, recent growth was also supported by a renewed focus on improving plan design, “with particular emphasis on the adoption of automatic services such as auto-enrollment and auto-escalation.”

“Based on Cerulli sizing, retirement specialists [excluding those in the insurance channel] control 44% of the total adviser-sold DC market,” Cerulli says. “Retirement specialists within the wirehouse channel hold the greatest assets per practice.”

Within the whole retirement specialist universe, 45% still do not offer services as an Employee Retirement Income Security Act (ERISA) fiduciary, highlighting the significant potential impact of the Department of Labor’s ongoing rulemaking in the area.

“Of the remaining half, 37% act as an ERISA 3(21) and a slim 13% serve as an ERISA 3(38) fiduciary,” Cerulli says. “Only 5% serve as a 3(16) ERISA fiduciary, which is related to plan administration.”

From an asset structure perspective, Cerulli says greater than half of DCIO assets reside in internally managed mutual funds, followed by collective trusts and institutional separate accounts. “Asset managers’ perspective on the use of collective trusts in DC plans is incrementally more positive than in the recent past,” Cerulli adds, “which is largely the result of a concentrated effort to increase education and plan sponsor familiarity with this investment vehicle.”

NEXT: Interest strong in income products 

Cerulli says recent survey data collected from “a broad group of asset managers, broker/dealers, and insurers” reveals that 48% of firms launched a new retirement income product within the last year. Cerulli recommends asset managers review how existing products may fit into a retirement income solution, but in terms of avoiding regulatory issues and meeting fast-changing client demands, “this is a space where it may benefit to be a latecomer.”

Revenue sharing as a topic will continue to be hotly debated, Cerulli says, “but asset managers that offer plan sponsors the flexibility to choose from various non-revenue sharing share classes (e.g., a non-revenue-sharing share class with sub-TA fees or a zero-zero share class) will be best positioned with the broadest opportunity set.”

Cerulli projects that almost half of all 401(k) contributions as of year-end 2015 will be directed into target-date funds, matching volumes of industry research marking the persistent dominance of TDFs in terms of capturing DC inflows.

Heading into 2016, Cerulli anticipates these trends to continue, while demand for 3(16) services will strengthen “due to an increasingly onerous regulatory environment.”

Information on obtaining Cerulli research, including “Defined Contribution Distribution 2015: Addressing Specialist Advisors in the Small and Mid-Sized Plan Segments,” is available here.