Industry Insight from Fred Barstein
Following the Money Can Make You Dizzy

One of the most common questions we get is, when will the 401kExchange Opportunity Index return to normal?  The Index, which is a measure of the percentage of plans that indicate the likelihood to change their record keeper, currently sits below 3% as compared to more normal levels at 5-6%.  Though record keepers are hopeful that the Index will rise, one of the catalysts may not be so appealing to many of the larger providers serving the small market.  When following the money in a 401(k) plan from a participant to advisors and money managers, the baked-in inefficiencies become glaringly apparent.  Because 401(k) and DC plans touch almost 80 million people, not including their families, the 401(k) industry can no longer be classified as a niche or feeder for asset managers even though there are relatively few advisors and providers that play a significant role.  The convoluted way that money flows could be retarding a more normal evolutionary process, but that could change and in turn lead to massive turnover.

Every time money is touched (see graph below), there is a cost as well an opportunity to charge a fee.  Only a relatively few experts understand the true costs and fees, but if plan sponsors did, there could a dramatic increase in the rate of record keeper change.  Large providers in the small market are in the worst position to be able to react to a demand for lower costs, especially if they have big well paid distribution networks and complex systems that are difficult if not impossible to re-engineer.  Smaller providers, or even larger ones that have relatively new and efficient systems, could attack monolithic providers based on costs (which is the main catalyst for plan sponsors in a commoditized market).  It will likewise be hard if not impossible for these vulnerable providers to restructure their wholesaling force on the fly while savvy ones will have realized that experienced retirement advisors, especially the 4,000 estimated Master Advisors, need less and different attention.

So yes, record keeper turnover could increase dramatically, perhaps precipitated by the passage of 408(b)(2) or the release of the new 5500 forms.  As Dylan once penned in Desolation Row, “Everybody is making love or else expecting rain…”.  Our advice is that providers should be assiduously preparing for a massive down-pour, which even if it does not occur, will only mean better margins.

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