Defined contribution assets dropped for the second year in a row in 2001, and the rate at which assets are declining is increasing.
According to a new study by the Society of Professional Administrators and Record Keepers, defined contribution assets dropped 3% in 2001, to $3.5 trillion, double the drop of the year before.
The SPARK study projects assets will begin growing again within the next five years, but not at the heady rate of past years.
Based on the new reality, defined contribution players already are making significant changes in the way they service the defined contribution business, said Robert Wuelfing, SPARK president.
SPARK's survey shows the defined contribution plan market accounts for 33% of the overall retirement market.
If the stock market returns to more historical levels, 401(k) plan assets should increase at an annual rate of between 11.5% and 12% over the next five years, and other segments of the defined contribution market should grow at nearly double digits, he said. For example, 401(a) and 403(b) plan assets are expected to grow at 9% a year over the next five-year, vs. growth rates of 8% and 6.5%, respectively, over the last five years. The Simple IRA/401(k) market, now with $130 billion in assets, is expected to build at the rate of 18% per year.
"Based on the employers we talked to, they have a good feeling about 2003," Mr. Wuelfing said. But that is not to say that all will be well in defined contribution plan land. The defined contribution market had been growing around 15% annually and money managers, record keepers and other service providers assumed that pace would continue.
Most of the growth will be in the small plan market, which has fewer assets, Mr. Wuelfing said. According to the study, the number of 401(k) plans increased by 4% in 2001, but the number of participants increased 2%, showing that most of the growth was in the small end of the market.
"For the first time, economics will play a role in (service providers') strategic planning process," he said. "They will have to become more efficient players."
What this means is that bundled and semibundled service providers no longer will be able to give away record keeping, he said. Instead, they will be outsourcing some functions.
In the past, companies thought they were getting a competitive advantage from their record-keeping systems, but record keeping is becoming a commodity, a product, Mr. Wuelfing said.
"They will have to be competitive through performance, distribution system, education and investment guidance, but it will not be through their back-room processing system," he said.
So, organizations may outsource the record keeping but keep more visible portions like the call centers, Mr. Wuelfing said.
"The top 20 players won't be driven out of the business," he said. However, new business strategies could create odd bedfellows. One idea that could be put to use, called "utilities" by insiders, involves service providers banding together to provide defined contribution plan services, he said.
"It hasn't happened yet because it is not an easy thing to do, but it will happen," Mr. Wuelfing said.
Number of ways
There are a number of ways it could be done. For example, a service provider that has set aside a relatively small annual budget for building and maintaining its record-keeping system, could, instead, combine resources with other providers to create a joint venture record-keeping business. All of the entities would then outsource their record-keeping business to the new joint venture.
Utilities haven't sprung up already because back in 1996, service providers "all believed they had the better mouse trap," Mr. Wuelfing said. "Now any improvement in service delivery will not get you any new clients."
In the coming years, more attention will be paid to the IRA market by service providers, because that is where SPARK projects the majority of the assets leaving defined contribution plans will be invested.
Investment advice models also will evolve as providers move to capture the assets that will be moving out of defined contribution plans, he said.
The current advice models may not be the answer. While 30% of participants have access to advice, fewer than 25% of participants have completed the process and less than that have returned to use the service again, the survey revealed.
"People still want one-on-one," Mr. Wuelfing said. "They want a life insurance agent, broker or financial adviser with whom they may already have a relationship. It's a major challenge."