LAKE WORTH, Fla. -- Boom times might be over in the 401(k) plan industry. More companies have 401(k) plans and they are changing service providers less often than was formerly perceived, according to a study by Insight In Formation.
Not only is the large-plan market near saturation, but also more smaller companies have 401(k) plans and will be changing service providers at a slower rate than previously anticipated, the study indicates.
"There's still a lot of opportunity, but it's not the Wild West where you put a stake in the ground and the land's yours," said Fred D. Barstein, managing director of the consulting firm.
By 2000, Insight In Formation's study indicates, 55% of companies with retirement plans with assets between $250,000 and $10 million will have 401(k) plans. The study indicates about 5% of companies with non-401(k) defined contribution plans and 5% of firms with defined benefit plans will switch to 401(k) plans before 2004.
Slower rate of change
At the same time, the percentage of smaller companies that will be switching 401(k) providers will increase. Currently 4% of companies with plans with $250,000 and $10 million in assets will change service providers, the study results revealed. In 2000, 5% will switch providers, bumping up to 7% in 2001 and 9% by 2004.
This is a slower rate of change than expected by earlier studies. For example, a 1997 Spectrem Group study indicated that just 16% of companies with between 101 and 500 employees would change record keepers and 14% of such firms would change investment managers in the 12 months ended August 1997.
In midmarket companies with $5 million to $100 million in plan assets, there are 8,000 401(k) plans that are changing service providers at the rate of 5% annually, Mr. Barstein said.
"There are no new plans in that market," he said. "It's a dog-eat-dog world out there."
Search for a niche
This means that within the next six years service providers will be searching for niche markets and plan sponsors might soon be finding bargains galore from their providers in the form of lower fees and increased services, Mr. Barstein said.
"In a maturing service industry, service providers can either lower prices or go to niche marketing and product differentiation," he said.
Insight In Formation's study differs from statistics released by Spectrem Group in its 1997 401(k)/Defined Contribution Market Needs Study.
That study concurs that future growth in 401(k) plan formation will be in small and midsized companies. For example, according to the Spectrem study, 93% of companies with more than 5,000 employees have 401(k) plans, increasing to 97% in 2002. About 81% of companies with between 1,000 and 5,000 employees had 401(k) plans in 1997, expected to rise to 85% in 2002.
However, only about a third of companies with between 100 and 500 employees had 401(k) plans in 1997, increasing to 40% in 2002, the Spectrem study indicated. Insight In Formation's study predicts 72% of companies with fewer than 150 employees or between $250,000 and $10 million in pension plan assets would have 401(k) plans .
Different numbers
The rate at which companies of this size would be switching service providers was also smaller than predicted by Spectrem's earlier study. Spectrem's study indicated 14% of companies with 401(k) plans switched investment managers and 16% changed record keepers in the 12-month period ended August 1997. By contrast, the Insight study indicated only 4% of companies with 401(k) plans would change service providers, increasing to 9% in 2004.
"It's a much higher penetration than people had thought," Mr. Barstein said, explaining the difference in the data.
Many were not surprised by the new study results.
"We know over the last four years there has been an explosion in 401(k) pension plan growth,"said David Wray, president of the Profit Sharing/401(k) Council of America, Chicago. "But there are 6 million small companies so we have a ways to go."
Mainly the growth in 401(k) plans is attributed to some regulatory changes that made it easier for small plan sponsors to have 401(k) plans, Mr. Wray said. Those changes came with the passage of the Small Business Protection Act of 1996 and the Taxpayers Relief Act of 1997, he said.
"At the same time the labor market has tightened up so there is some expectation from employees that there will be a 401(k) plan for them," Mr. Wray said. "But it's not as much as we need. We need to increase limits and get rid of top-heavy rules."
Already, the costs are coming down, even in the smaller markets, Mr. Wray said. While costs will remain higher in the smaller markets, they are becoming more competitive. Plan sponsors that shop around will get the best deals, he added.
Just getting started
Smaller plans also are just starting to get more service, Mr. Wray said. According to a council study released in September 1998, 63% of plans -- regardless of plan size -- have daily valuation.
John Upton, principal of Retirement Consulting Group Inc., Portland, Ore., said he sees the most growth in what he called the emerging market, plans with between $2 million and $20 million. Currently, he said, the larger 401(k) service providers look at three factors when determining whether to take on a plan: plan size, rate of contributions by employer and participants and average participant balance.
Among these factors, average account balance could be the most important consideration because it expresses the asset base in relation to the most expensive service component: record keeping, Mr. Upton said.
"In my opinion, the emerging corporate market is where a great deal of action will be but it is also the hardest place (for service providers) to make money," Mr. Upton said.
Vendor shifts
Even if large service providers create a division to handle the smaller plan market, they could rapidly reach a saturation point at which the record-keeping costs will make it uneconomical to stay in that business, he said.
This would leave this corner of the 401(k) world to smaller, less capitalized service providers that came later to the market.
"Those 300 or so service providers are scratching their heads and trying to figure out what's going on and how to make money," he said. "It's the old story. The large get larger and the small try to figure out how they got that large. I do not know how small money managers will be able to compete."
Mr. Upton predicted that in a maturing 401(k) market, smaller service providers will begin to consolidate with larger ones to gain the distribution, service systems and capital they need to exist in the emerging marketplace.
"There's big, big opportunity in the under $250,000 401(k) market, but no one wants to go there," Mr. Barstein said. "Whoever learns to make money in the small market will win. It's a lot easier to change your product than change the market."
