The 401(k) market has matured into a classic winner-take-all market with increasing plan sponsor power. But it is a frustrating win, as sponsors find shrinking choices in the marketplace.
As power shifts from the sellers, especially large mutual fund companies and other providers of bundled services, selling and marketing to the current 401(k) market has become increasingly unproductive.
Surveys by my firm show only 2% to 4% of existing 401(k) plans will be changing service providers at any given time.
In some markets the percentages are even smaller. Informal reports from a survey of California show a percentage too low to measure.
This apparent trend already has started to have a broad impact on plan sponsors and providers. Paradoxically, as plan sponsors are looking for more options, products are being removed from the marketplace.
As this often-predicted industry consolidation gains momentum, 401(k) providers' traditional sales and marketing efforts are becoming increasingly ineffective. Providers are caught between plan sponsors who are seeking more customized programs and rapidly shrinking new business opportunities. New product, marketing and sales strategies are being reworked or abandoned.
New market data is coming from large samples of direct, person-to-person interviews of plan sponsors where they report their satisfaction with their current providers.
This tendency is gaining confirmation from different sources. LRP Market Research, West Palm Beach, Fla., in its 401(k) MarketSource report, which conducted more than 60,000 interviews with plan sponsors, found 5.8% of plan sponsors are unhappy and actively searching for new relationships. This percentage might be decreasing.
Separately, Marketing Decisions Inc., Waltham, Mass., reports a 2% to 4% prospect rate in recent surveys. Spencer Harvey, an MDI vice president, reports, "Our clients in the 401(k) business are finding it difficult to deliver a differentiated message to the marketplace. Unless the plan sponsor is feeling a high degree of pain in their existing provider, there is little incentive to switch."
John Mulligan, president of Retirement Plan Strategies, Braintree, Mass., asserts, "The market is the most mature in the large corporate segment, where more and more there are negotiations for shared relationships among providers instead of firings and new hirings for bundled providers."
Still against the hope that the challenging new business environment is an anomaly of current conditions, additional data on plan sponsors' satisfaction with their existing providers suggest the low plan sponsor change rate has become a long-term trend of the market. Typically, well over 90% of plan sponsors say they are happy and staying put.
Attempts by 401(k) providers to enter this market or gain significant new business are daunting.
The positive trend hidden in this data is the shift in power from providers to plan sponsors who increasingly are dictating terms or simply staying put. At my firm, we work with plan sponsors who want to significantly improve their plans. They look over their shoulders daily, as the bull market continues to mark new highs, and get nervous. But they are short-staffed and too stretched for resources to meet growing government and employee demands - they need to outsource.
Plan sponsors may be frustrated, however, as stalled growth at 401(k) provider firms hampers innovation to meet their needs. There is not enough new business to be a base for new ideas.
Stalled sales at 401(k) providers are an indication that innovation and new products may be slow in reaching plan sponsors. Informal reports suggest sponsors are seeking more diversification in investments, services and providers.
A chief financial officer recently said she wanted a new provider but did not want to be a "small fish in a big pond." She might find that wish challenged by a shrinking pool of providers as many exit the business, limit reinvestment or narrow their service offerings.
Providers may be successful if they shift to accept more modest sales growth and competing at the margins. This helps avoid either the plan sponsor or provider's sales person wasting time "off target."
Astute plan sponsors, who recognize their growing power in the marketplace, are rejecting generic packages and negotiating tougher.
These "street smart" plan sponsors know that even with many companies offering services, only one or two will really deliver a customized package. At the same time, better buying information is becoming available to plan sponsors. LRP plans to produce a plan sponsor 401(k) "consumer guide."
Some providers are leaving the market, but plan sponsors and their employees cannot exit.
Sponsors are migrating into specialized segments with special needs and service goals. Providers willing to get their hands "dirty" by delivering on the details will win.
