July 6, 2011

Regulatory Pressure Stresses DC Plans' Revenue

New fee disclosure rules will 'shape the future' of DC plan market

Retirement plan providers’ revenues are being stressed by intense scrutiny from regulators and legislators, a report released Wednesday by the Financial Research Corp. found. Continued scrutiny over fees and defined-contribution plan outcomes has put pressure on revenues and “will shape the future of the DC retirement plan market.”

“Overall, we believe that plan-level profits are likely to be squeezed across most stakeholders,” Leslie Prescott, author of the FRC study, said in a statement. “Prospects for growth exist for firms that understand the current market dynamics and position their organization to take advantage of these developments.”

Prescott noted that government regulations have a “profound and varied” affect on retirement plans.

“Currently, as a result of impending fee disclosure requirements, as well as high-profile press coverage and evolving economics, plan sponsors are focusing on total plan costs and how they can be reduced,” Prescott added. “Enhanced fee information is becoming available to plan participants and there is heightening competition among record keepers of all types and sizes.”

FRC analyzed data from BrightScope’s retirement plan database and found the average participant-paid costs as a percentage of assets for the smallest plan groups was more than three times those of the largest plans.

Plan sponsors are looking for different investments for their plans in anticipation of increased demand for cost reductions when better fee disclosure improves understanding among participants.

“Both the total amount of plan fees as well as the clarity of the fees are expected to create openings for a wider variety of investment structures beyond basic non-institutional class mutual funds,” Prescott said, pointing to fully-indexed target-date funds, which have captured 27% of target-date mutual fund assets, as an example of the “innovation and competition” that can be expected.

“As always, change leads to both opportunities and challenge,” Prescott said. “With more information available about the costs of their plans to plan sponsors and participants, plans of all sizes will soon be able to evaluate plan management in a way only the largest plan sponsor could before.”

Prescott noted that independent record keepers with 15% of defined-contribution assets will likely face the greatest pressure.

“Asset managers, advisors, and record keepers must take stock of their own situations and will need to develop fitting strategies to achieve success as the industry moves into a post-fee disclosure era,” Prescott concluded.

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