By Cyril Tuohy
Financial advisors and insurance carriers operating in the defined contribution (DC) retirement plan market should anticipate tougher competition and more pricing pressure as giant mutual funds move “down market” and offer their services to small and midsize companies, the traditional clientele of insurers.
Offering everything from annuities to 529 college plans to all manner of individual retirement accounts (IRAs) through robust websites and fast-loading mobile apps, giant retail fund complexes are redrawing the DC plan map, analysts said.
“Fidelity and Vanguard have made it very easy for people to roll over other plans or convert DC plans into IRAs,” said insurance consultant Robert McIsaac. Finding ways to move assets from one platform to another “is really key.”
In the past, giant mutual funds rarely bothered with small plans, but the funds have built enough scale to make managing even small plans profitable.
Huge fund complexes recognize that the nature of employment is much shorter than it once was and that employees and managers are likely to have relationships with many employers by the time they are ready to retire, said McIsaac, principal with the insurance consultancy Novarica.
“Many carriers and advisors are not thinking too much about that yet,” he said in an interview with InsuranceNewsNet.
Every time employees are laid off or change jobs and consider what to do with their retirement plan balance, it’s an opportunity for mutual funds to grab the account from a carrier and nibble away at an insurer’s asset base -- a phenomenon known as “plan leakage.”
Preventing leakage is more important than ever due to lower profit margins inherent in managing smaller retirement plans and the low interest rate environment to which insurance companies are acutely sensitive.
McIsaac, co-author of a recent report on DC plans with Novarica research manager Steven Kaye, said that as life carriers find themselves competing with banks and mutual funds for retirement plan assets, advisors offer a “compelling differentiator” to plan sponsors.
The deeper mutual fund giants reach into the DC market, the thinner the profit margins and the more advisors need to talk about how to service the retirement plans of their smaller plan sponsors, McIsaac said.
The fight between large mutual funds and insurance carriers over market and wallet share is real, and life carriers have no intention of letting big fund complexes take retirement assets from them without a fight.
As much as $5.1 trillion in assets were held in DC plans, according to data published by the Investment Company Institute, which represents the mutual fund industry.
Of that total, $3.6 trillion are held in 401(k) plans. An additional $1 trillion are held in 403(b) and 457 plans. Small business retirement plans such as Keogh and profit-sharing plans contain an additional $500 billion, according to ICI data.
Insurance companies still command an enviable position in the DC market. Of the top-10 defined contribution money managers, four are affiliated with big life insurance operations: Fidelity, PIMCO, Prudential and TIAA-CREF.
These four asset managers alone control $1.4 trillion in assets, or just under one-third of total assets under management for the nation’s largest defined contribution managers, and carriers continue to make technological improvements to their core systems.
Still, advisors would do well to get retirement plan participants “enrolled early and often,” McIsaac also said. The more employees participate in retirement plans, the higher the profitability for the advisor, the carrier and the sponsor, he said, particularly as there’s still plenty of room to grow.
Participation rates in employer-sponsored defined contribution plans are only about 70 percent. Even with the passage of the Pension Protection Act of 2006, which made it easier for employees to enroll in a company-sponsored retirement plan, the 70 percent rate is relatively low compared to the benefits those plans offer.
Analytics-driven insights play a key role for plan advisors, McIsaac also said. The faster carriers can offer robust, easy mobile platforms for advisors, brokers and participants, the better the chance of engaging in conversations around retirement planning and retaining a plan sponsor.
With regard to technology platforms, banks, he also said, are rapidly adopting a “mobile first” approach from which everything else flows.
A new report this week from Nielsen finds that nearly 65 percent of Americans have smartphones, an increase of nine percentage points from the beginning of the year.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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