Industry Insight from Fred Barstein
Airline Industry Offers Interesting Insights for the DC Industry

With the recent announcement of the acquisition of AirTran by Southwest Airlines, it is worth reflecting on the parallels between airlines and Defined Contribution record keepers.  The similarities are striking not just for the big institutions, but also the smaller businesses that have grown up around and are supported by the two.  Perhaps lessons learned and the present state of the travel industry can give the DC industry some insights on how to portend their future and avoid the same mistakes.

The airlines and DC businesses are dominated by large institutions working in a one-time glamorous market that is currently suffering hard times as their services are viewed as a commodity.  Both airlines and record keepers require massive amounts of capital investment, people, and technology.  Whether self perpetuated or goaded by advisors/travel agents, there is a price race to the bottom with only the healthiest able to survive.  When times are hard companies lower prices to fill up capacity that lays fallow if not used.  There’s an entire food chain of independent businesses that must work together seamlessly and flawlessly; independent 3^rd parties are used to sell the services and security is a huge issue on which massive amounts of money is spent.  There’s a stark difference between low cost and full service providers with the former faring better in a commoditized market.  Finally, the end user in a corporate setting may not be the party buying the services.  While there are some substantial differences like fiduciary liability and personal relationships required in retirement planning, there are many more similarities.

So what can we learn?  First, there will be massive consolidation among record keepers as the cost of sustaining infrastructure, far flung 3^rd party networks, and technology increases.  Only a few can afford to compete, but they should be willing to pay a premium for business that is more profitable on their platform than under a separate one.  Though it has not happened in the US, there is the threat that the government will nationalize the industry or at least create the option for a service considered vital to the health of the economy.  With price pressure, more sponsors and participants will be forced to use technology rather than talk with people.

Like with travel agents, advisors cannot afford to just get travelers from one destination to another at a reasonable price, which in the DC world translates into picking the right record keeper and funds.  Advisors must do more to justify their fees, as the difference between record keepers grows slimmer and delivering alpha through selecting funds rather than asset allocation becomes harder to sustain.  No longer can advisors arrange the flight (record keeper) and hotel (funds) and then wish participants good luck on finding their own way to a secure retirement while expecting to be paid a premium.  Expedia can do that cheaper and easier.  Only advisors that can deliver participants to a secure retirement while minimizing costs, work, and liability for their corporate client will be able to justify a premium or even their existence.  It’s only going to get harder for DC advisors to deliver on that promise without the support of a larger, well funded organization.

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