Industry Insight from Fred Barstein
Watching the Immovable Object v. the Irresistible Force

After three years of what seems like an industry holding its breath with very little, if any innovation, the 401(k) industry is on the verge of significant change.  With the government breathing down our necks, lawyers threatening massive class actions, plan sponsors unwilling to change record keepers, efficient markets that fewer than ever managers can beat,  and the emergence of the "Elite 5,000" DC advisors who are growing their businesses at prodigious rates, status quo is unlikely.  There is an abundance of record keeping manufacturing resources with diminishing demand.  Even the powerful and established providers are wondering, "What’s next?"  Like the fight between the immovable object and the irresistible force, or between inertia and gravity, small and mid market bundled providers are headed for a battle with low cost open architecture record keepers. This mirrors the active, higher priced managers who have been battling low cost indexers over the past decade.

Bundled providers, defined as those that offer an integrated platform whether using an outside TPA or not, offer the under $100 million market and especially the under $10 million market exactly what they want:  name brands, complete solutions, and high-touch integrated service with little or no cost to plan sponsors.  Built on massively expensive technology, surrounded by extensive service networks and supported by colossal national distribution forces, the success of providers like Hancock (View Provider Profile) and ING (View Provider Profile) has been unparalleled.  Sneaking up quietly are mostly smaller, independent record keepers like NextStep (View Provider Profile), BPAS (View Provider Profile), RSM McGladrey (View Provider Profile), and ExpertPlan (View Provider Profile) offering open architecture, transparent pricing, and low cost – just what the government wants and lawyers don’t.  The siren call of the independents is that participants will accumulate five or more years of additional retirement using their systems.  Those steeped in this philosophy, typified by members of CIKR, cannot understand why everyone does not use them and predict the inevitable demise of the monolithic bundled providers.  Immovable object v. irresistible force; inertia v. gravity.

The market moves on distribution and no independent provider has anything comparable even larger ones like Ascensus (View Provider Profile); customer service and hand holding is limited to keep down costs.  401(k) plans are not bought - they are sold, especially to plan sponsors who are relying more and more on financial advisors.  With their business doubling and tripling over the last few years, the Elite 5000 DC advisors who control the under $100 million market have less time than ever to manage the process that working with independent, non-integrated providers requires.  And no one even whispers about creating a proprietary sales force other than the payroll companies like ADP (View Provider Profile) and Paychex who are now working more closely with advisors.

So when will gravity overcome inertia?  When will the immoveable be moved, by whom and when? Will sponsors start changing record keepers at a more "normal" rate?  Can the independents create a formidable distribution network?  Is anyone even thinking about how to assemble a national distribution force with high touch service fostered by technology, and backed by a network of independent record keepers?  Though answers to these questions would be nice, first we need to understand whether we are asking the right questions.  And to this I think there is no question.

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