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The Future of the Small DC Market

While the industry axiom is that changes in the DC market start with the largest plans and move down market, there may be some outside forces that will affect smaller DC plans outside of larger plan changes.

Smaller companies have less time, resources and interest to focus on their retirement plan. Many are privately held, with business owners counting on their equity in the company to be their primary retirement asset.

With that in mind, here’s a view of what the smaller plan (<$3 million) market might look like in three years:

  • MEPs – More companies will join a multiple employer plan (MEP) or group plan, pooling assets and intellectual capital, as part of either a state-run MEP or a private group, or even perhaps through a PEO. It often does not make financial sense for a smaller company to go it alone even if they have to file a separate 5500.

  • Effect of DOL Fiduciary Rule – Almost all advisors – certainly those who work with retirement assets – will be considered fiduciaries. Although more DC plans will continue to hire experienced plan advisors, the death of the so-called “Emerging Advisors” is greatly exaggerated. Instead, it’s likely that broker-dealers will force less experienced advisors to partner with more experienced ones on larger plans and put guardrails around products that these emerging advisors can sell, using outsourced fiduciaries and limiting the providers they can use, the fees charged and the investments offered.

  • Convergence of Benefits – The move to high-deductible health plans and greater usage of health savings accounts (HSAs) will force companies and employees to look at their entire benefit budgets, making decisions based on their needs and socio-economic positions of the participant rather than formulaic prescriptions. Advisors that can manage this expanding range of benefits, as well as the assets of the owners and highly paid execs, will be in demand and will be more profitable.

  • Elite Advisors Create Their Own “MEPs” – Margins are being squeezed in larger plans, so the Elite Advisors (said to total about 2,500 with >$250 million DC AUM) are looking down market to leverage their expertise and position with RKs. They will create set service models and investment menus using one or just a few RKs, which may function like a MEP by another name.

  • RK Market – Consolidation will hit the micro market, with the survivors in the advisor market ($3-$250 million) buying out providers owned by private equity firms and others offering more robust technical capabilities, leveraging robo-advisors and low-cost funds. The myth that smaller plans will flock to robo-recordkeepers does not take into account the reality that smaller plans need more help and that those plans continue to be sold, not bought.

  • State and Eventually Federally Mandated Plans – Like with health care and the ACA, a growing number of smaller companies will probably be required to offer retirement plans, which should flood the market with smaller plans. Although the state options now have something of an advantage by not having to comply with ERISA, even large states like California are relatively small compared with the national market that most providers have access to. Some providers in the advisor market can service small plans but at a great cost – others will buy micro providers who have figured out how to make money and keep those companies separate.

What’s your take? Use the comment box below.

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.