Industry Insight from Fred Barstein
Maturation Process of the 401(k) Industry

The 401(k) industry is about 30 years old, which as an industry puts it in its teenage years.  The profession of being a 401(k) or defined contribution advisor is about 15 years old, meaning it is just starting to exit adolescence.  As often happens, a crisis can cause the acceleration of the maturation process.  With very little innovation or change over the past three years, perhaps we will begin to see some real conceptual innovation compared to experimental innovation.  Regardless of what happens, the future of the industry depends on how well the emerging group of DC specialists guide the industry as they come of age - which is when conceptual innovators do their best work.

The foundation of our business and power base is with record keepers who have built very solid and in some cases great platforms.  This is typical of experimental innovators who make progress one faltering step at a time.  As plan sponsors have woken up to their responsibilities and liabilities, which they thought they could escape from when they shifted from DB to DC plans, they realized that changing record keepers will not make that much of a difference.  This has resulted in an extremely low turnover rate of 2.5%.  Even with many more funds to choose from, sponsors realize that the chances of beating the market by selecting hot funds is low and even lower for their participants.  Followed by auto-plan features in the Pension Protection Act, target date funds have been the greatest innovation in the last five years, but DC plans have not achieved the success of DB plans by replacing significant income and protecting them.  Essentially, we have built the plane, taken off, told participants where they need to go, and then parachuted off hoping they could guide and land the plane themselves. 

With over 12% of plans looking to change their advisor, sponsors believe the key to improving their plans lie with DC advisors serving the under $100 million and eventually the under $250 million markets.  A majority of this group of “master advisors” have doubled and even tripled their book of business as measured by plans or assets over the last two to three years.  As this profession emerges from adolescence, they have a unique opportunity to land the plane while building a great business.  After a crisis like the recent financial earthquake, the opportunity opens for new leadership.  The question is no longer whether or not DC advisors have the equipment or skill-set to land the planes, the question is if they can be trusted to guide it to safe territory and make significant improvements through conceptual innovation.

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