At a 2003 wirehouse event for their plan advisor specialists, I was asked on stage which record keeper would be the next to exit the market.
Those were days when 10-15 providers exited each year, causing lots of turmoil, opportunity and prurient interest. I foolishly answered that question and, even though I turned out to be right, I realized the better question is which record keepers are not likely to exit — defined as 401k Heaven.
That 401k Heaven is not just for record keepers these days as the DC market comes of age. DCIOs, advisors, plan sponsors and participants have their own versions of 401k Heaven and 401k Hell. But let’s start with record keepers because they inspired the concept.
Focusing on advisor sold, national record keepers that serve the $1-$250 million market, the definition of 401k Heaven has evolved since a time when all that was required was a platform, decent service and distribution, as well as 500,000 participants to track. Since then, while technology and the significant investment in upgrades and innovation is required, what’s defining winners today is the ability to serve small, mid-size and larger plans but, even more importantly, the ability to service the so-called “Emerging” advisors as well as Core and Elite advisors.
Small-market record keepers without the ability to serve larger plans as well as experienced advisors have no future, as plans get picked off when they grow. Midsize and larger plan record keepers have no foundation from which to grow. As the plan advisor market matures into those three distinct markets, record keepers have to not only have the right tool set and platform to competitively serve all types of plans, they need to have a sales force that services mostly emerging advisors, requiring a transactional mentality to succeed in an environment where lots of small plans have to be sold and another group which requires patience and consultation.
There is room for nine providers in this market, which does not include outsourcers, micro and mega market providers or those that are part of a national broker dealer or bank. Four are firmly established, three are well positioned each with unique challenges, leaving seven to fight over the last two spots. Look for at least one big name record keeper to sell soon.
Added to the characteristics of a national, advisor sold record keeper in 401k Heaven is the ability to make money from record keeping, as pushing proprietary assets will only get harder in the future, as a result of DOL regs, lawsuits and greater due diligence. Not that proprietary TDFs or stable value will go away, but reliance on them for profitability leaves a provider vulnerable. To be profitable, record keepers have to become more disciplined, not trying to win every case, but understanding their core competency where they have an advantage, rather than being forced to compete solely on price.
A tall order for many, and one likely to be accomplished by just a few.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
