PORTLAND, Ore. - Size counts.
When it comes to surviving in the defined contribution plan business, the number of participants under record keeping and average size of participant accounts are critical, according to a new survey of defined contribution record keepers.
At the same time, most respondents acknowledge they are doing a poor job meeting the needs of plan participants, according to the survey, conducted by Investment Management Consultants Inc., Portland. Seventy percent of respondents indicated they are doing a below average job of interacting with plan participants in a way that meets their individual needs and learning styles.
Other important factors needed to win in the defined contribution business, according to the respondents, included: the total amount of assets under record keeping; how those assets are allocated; how much money they receive from other firms for offering outside funds among their investment options; and whether investment menus will stand up to increased regulatory scrutiny. Also at issue were: what service model to offer; how to keep down distribution costs; what part of the market to focus on; what technology to offer and to invest in; how to determine the number of professionals that should be available for sales, customer service, etc.; how the defined contribution, defined benefit and individual retirement account areas should be organized; how much focus should be on customer satisfaction; and how to adapt to change.
Over 1 million
Overall, most of the 40 record keepers responding to the survey said that within three years, a successful defined contribution service provider would need to provide record keeping for at least 1.2 million participants with an average account balance of more than $60,000 each.
The majority indicated that within five years, the full-service cost for record keeping would need to be less than $90 per participant. However, 20% said the cost would need to be between $90 and $100 per participant. The majority, 80%, either agreed or strongly agreed that smaller record keepers would survive by astute target marketing and by identifying niches.
The place of mutual funds in the defined contribution world appeared to be secure. The vast majority of respondents, 93%, indicated mutual funds will continue to dominate the defined contribution marketplace in the next three to five years, and 77% predicted mutual funds will be the investment vehicle of choice in 10 years.
There was no agreement on what investment vehicles will have "exceptional futures in the defined contribution business." The top contenders, each chosen by more than half of the respondents, are: institutionally priced index funds; lifecycle funds; best-of-class multimanager vehicles; and flexible price collective trusts. Thirty percent of respondents said unitized defined benefit-priced separate accounts have exceptional futures in the defined contribution business.
But when it comes to giving participants what they need, record keepers give themselves failing grades.
For example, on a scale of 1 to 10, respondents gave the industry an average score of 4.5 on interaction with participants.
Providers don't score better on services they provide to plan sponsors, either. Survey respondents were split on whether the industry "does an excellent job in investment due diligence." Thirty-seven percent agreed or strongly agreed that it does, 38% disagreed or strongly disagreed, and 25% were neutral.
Similarly, there was no consensus among respondents about what technology to offer. Larger record keepers have the resources to drive technology solutions into the marketplace, while smaller firms are taking a wait-and-see approach, said Ron Eisen, IMC president. Plan sponsors and participants have been dissatisfied by high-tech solutions as often as they've been dissatisfied by record keepers that don't deliver services in a timely manner, he said. The majority of respondents indicated they will need to offer either no-blackout or weekend-only conversions, screen scraping (using participants' passwords to get all their financial information online, allowing the provider to offer such services as complete financial planning individual portals or investment advice), voice-recognition services and wireless device access to participant accounts within the next two to three years.
"This is a complicated business, and the industry is far from converging to only one or two service models for how it is to be done," Mr. Eisen said. "Reading between the lines, it appears that there seems to be agreement that there is a need to keep score on service, but very little agreement on what items to measure and where to place the bar."
This is important because a disproportionate percentage of plan assets and large participant accounts are concentrated among 45 to 60 year olds, Mr. Eisen said. If providers want to retain the assets when these people retire, they need to do a great job of providing services to them while they're still employed.
A strong majority of respondents, 92%, either agreed or strongly agreed that retaining a high percentage of rollovers from client plans is going to be crucial to the long-term success of record keepers in the defined contribution business. What's more, 78% of service providers either agreed or strongly agreed that rollover investors are likely to consolidate all of their retirement accounts with one, or at most two, providers. And 60% of respondents who felt that way indicated rollover investors already are consolidating their accounts with one or two service providers.
Capturing these assets won't be for the timid. Eight-four percent of respondents indicated that, to be competitive, the administration price for rollovers with balances of $100,000 or more should be zero. Seventy percent said that to capture a high percentage of rollovers from existing plans and attract assets from other record keepers, a provider would need to offer face-to-face access to a planning professional; 45% said a provider would need to offer local office convenience; and 80% indicated they would need to offer online financial planning advice. Some 65% to 66% indicated providers must start offering these services now.