More mergers, acquisitions and joint ventures are likely in the defined contribution market in 1996.
Observers say the 401(k) service industry, which experienced heightened competition for plan sponsor business in 1995, will begin to show the inevitable symptoms of a maturing industry.
Plan sponsors and participants will reap the benefits of a buyer's market over the next year as services improve and vendors are forced to provide services more efficiently and at less cost.
Other likely defined contribution market developments in 1996 include:
A scramble by all major vendors to provide interactive on-line services for participant account management, run over both private and public networks, such as the Internet and America Online Inc.
Greater use of independent consultants by all sizes of defined contribution plan sponsors to evaluate and select service providers, both on the investment and administrative side.
A move by vendors to outsource basic services to specialist providers.
The development and more widespread use of aggressive participant investment education materials, following the release of a draft of the Department of Labor's interpretive bulletin on educational materials.
Heightened participant scrutiny of plan features, costs and sponsors' operating procedures, as a result of the Labor Department's well-publicized crackdown on employer misuse of employee contributions and new proposals for tighter contribution deposit requirements and stricter plan auditing procedures.
The "mainstreaming" of advanced plan service features - such as automated voice-response systems, daily valuation, life cycle funds, customized education - for all sizes of plan sponsors at a reasonable price.
Plan sponsors' continued interest in total benefit delivery systems, which give access to information about all company benefits through one voice-response system.
Fidelity on cutting edge
In the online area, one of the largest defined contribution players, Fidelity Institutional Retirement Services Co., Boston, will introduce full transactional capabilities for participant 401(k) accounts over both the Internet and America Online in the first quarter. So far, only BZW Barclays Global Investors N.A., San Francisco (formerly Wells Fargo Nikko Investment Advisors), has offered plan participants full management access of their 401(k) plans over the Internet. The Vanguard Group of Investments Cos., Valley Forge, Pa., also offers transaction capabilities online, but uses a private closed network rather than a public service.
Fidelity plan participants will be allowed to not only check their Fidelity account balance, but also change the amount of their salary deferral, the allocation of their assets and enroll in their employer's retirement plan over the two online systems. Employees also will be able to model the performance of their individual portfolios over various time periods and will be able to project the repayment of loans taken from their retirement accounts.
As a safety measure, employees will not be able to initiate a loan withdrawal online, said Robert L. Reynolds, president of Fidelity Institutional.
Ten Fidelity institutional clients have agreed to test the new service. Retail access to the online management system will follow.
Separately, Fidelity will introduce a voice-recognition system on its automated voice-response systems, eliminating the need for a touch-tone phone or manual commands. The system now recognizes 27 English words; more vocabulary will be added throughout 1996, and service in other languages is planned.
Fidelity also is refining a service that allows participants to customize the way they access account information on Fidelity's voice-response system. Employees can customize the system any way they want to, said Mr. Reynolds, so that once their PIN and Social Security numbers are added, for example, the standard greeting and menu messages are bypassed, and performance information provided.
Such features will have Fidelity's competitors racing to match the service, said Robert Wuelfing, president of Access Research Inc., Windsor, Conn.
Vendor jockeying expected
Sponsor interest in total benefit outsourcing also will have vendors jockeying hard next year to pull together both the consulting and plan design expertise and the heavy-duty transactional system capabilities needed to give participants the answer to all of their benefit inquiries on a single voice-response system.
Mr. Wuelfing pointed to the late 1995 marriage for total benefits delivery of State Street Bank & Trust Co., Boston, and Watson Wyatt Worldwide, Washington, as the kind of partnerships likely to form between consultants with technical expertise in designing the delivery systems and service companies that have large enough systems and deep enough pockets to support the technology-intensive needs of such a practice.
Other vendors probably will follow the example of NationsBank N.A., Charlotte, N.C., which outsourced all of the record keeping for its defined contribution plan business to Actuarial Computer Technology Inc., Boston.
"You will find more and more strategic outsourcing, not just by sponsors, but also by vendors, to maximize efficiencies," said Mr. Wuelfing.
"1995 was a year of maturation for the defined contribution industry, as vendors developed and defined the building blocks they need for continued success in what is becoming a very competitive industry," said Robert C. MacFarlane, managing director of defined contribution vendor consultants, Information Strategies Inc., New York.
"1996 will be the year of contraction," Mr. MacFarlane continued, "as vendors define which products are working and which aren't and figure out how best to deliver services nationally."
In response to sponsor and participant demands, vendors last year broadened their product lines, including funds from other fund families and better record keeping and customer services. Vendors targeted more seriously the smaller market niches of 457, 403(b) and group and rollover individual retirement account plans, Mr. MacFarlane said. Vendors also have been working on developing national distribution strategies, searching for operating economies of scale and better efficiencies.
M&A wave predicted
Mr. MacFarlane suggested a wave of mergers and acquisitions will sweep the defined contribution market as vendors, particularly among banks and mutual fund companies, seek to plug holes in their product offerings through a buy-in of talent and business.
Regional third-party administrators will be the likely prey of national players, seeking to buy, rather than build, both market share and a large participant pool.
"The market can't support so many players," agreed Rich Koski, a principal and benefits consultant in the Secaucus, N.J., office of Buck Consultants Inc.
Mr. Koski said increasingly sophisticated sponsors will begin to force vendors to justify their charges, to show why and where fees are being charged for both investment management and administrative. "There is going to be a new and strong emphasis on what value service providers are adding and at what price, especially when a plan experiences a drop in investment performance. Vendor fees will be the source of much more intense scrutiny," Mr. Koski said.
Many of the advanced service features previously affordable only for the largest sponsors will soon be a basic requirement for smaller plans, he noted.
Because of the increasing complication of the defined contribution market, plan sponsors likely will increase their use of outside, independent consultants to help in choosing new service providers. Ron Bush, vice president at Access Research, said he expects the number of defined contribution plans using the services of consultants to increase to about one-third, up from 20% to 25% of large sponsors three or four years ago. Mr. Bush said he also thinks consultants will be working hard to package and price their services appropriately for the small and midsized plan sponsor.
Access Research predicts that defined contribution plan sponsors will move about $80 billion of assets in 1996. About $50 billion of the available business will be allocated to bundled service programs. Mutual fund companies will continue to maintain their dominance of the marketplace, winning as much as $48 billion or 60% of the business changing hands. Banks will follow, likely attracting about $20 billion or 25% of the booty, followed by insurance companies, which may attract about 15% of new business, mostly from small companies, said Mr. Bush.
But not much of the industry consolidation has come to the attention of most plan participants. "Probably the most memorable DC story of 1995 to the man on the street came from the Department of Labor, when they announced the mishandling of employee contributions and caused a big panic across the country," said Jim Klein, a national practice leader in the New York office of Towers, Perrin. "It was very unfortunate publicity, because it got people all worried about something that affects very few people." Consultants predict plan participants will continue to be more aware of the safety of their retirement plans; most consultants think such scrutiny is not all bad.
Mr. Wuelfing of Access Research said he expects even more aggressive participant education, as plan sponsors react to the Labor Department's guidelines on the line between investment education and advice. Mr. Wuelfing noted that while investment education has been improving in quantity and quality in the past year, participant behavior has been slower to change.
"Most of the asset allocation changes over the last year have been to new contributions, rather than a widespread transfer of existing account balances. Sponsors and vendors are going to get bolder about conveying their message," Mr. Wuelfing said.