Industry Insight from Fred Barstein
Uncertain Times – Big Opportunities

THE BIGGEST PROBLEM with the current economic conditions is that no one is sure about the extent of the problem. If Bear Stearns can become basically insolvent, who’s next? Though most of the major 401(k) record keepers do not appear to have significant exposure to the credit crisis, no one is immune to a long-term market downturn. Based on the last recession in 2001, here’s how the major players could expect to react over the next six to 18 months, assuming there is no surprising economic recovery.

Sponsors will continue to do nothing, meaning that they will change record keepers at an even slower pace. They will, however, be open to meeting with an experienced retirement advisor who has the knowledge to guide them through uncertain times. They will also be willing to change investments most likely, moving to more conservative, low-cost alternatives as well as asset allocation funds. As sponsors look for answers with more focus on fee disclosure, absentee or ignorant blind squirrels will not have the answers, and few of them will be able to convince more savvy sponsors to hire them.

Record keepers will be hurt the most and, based on history, they will overreact by cutting back on important services and personnel. The problem is that record keepers’ business is designed to do overly well when the market rises and overly poorly when the stock market tanks, because their revenue is based on assets while costs are based on plans and participants. Many record keepers react exactly the opposite from how they advise their clients – they panic during a tough market ignoring long-term opportunities. Expect more consolidation, and beware of record keepers who say their business is “outstanding” or those that spend like drunken sailors.

Many investment only providers are just beginning to build their DC business so, while we do not expect them to be overly aggressive, neither do we expect them to retreat. With more open investment platforms, advisors become the key decision makers, and they should expect IO providers to support their practice management needs. And while broker dealers will see their revenue decline in lock step with the market, more of them are interested in fee-based revenue in general and retirement, especially rollovers, specifically.

Experienced retirement advisors see these turbulent times as an opportunity to gain market share from direct providers, high-priced consultants and blind squirrels. Taking the cue from broker dealers, advisors should begin to leverage their positions as their clients’ designated retirement specialist to manage participants’ outside assets and rollovers. They should also look to sell more financial and benefit services to their client companies. Record keepers, IO’s and broker dealers will be wise to support these entrepreneurial advisors, saving the “tough times” speech for the blind squirrels. If providers get cheap, perhaps it is time to look for partners that invest for the long term and are, therefore, most likely to survive these uncertain times.

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