Amid intense fee compression in the defined contribution (DC) market, financial planning and wealth management are becoming more attractive service offerings to recordkeepers, plan advisors, and other DC providers, according to The Cerulli Report—U.S. Retirement End-Investor 2022: Fostering Comprehensive Relationships.
DC providers are well positioned to nurture deeper, more comprehensive relationships with retirement investors that extend beyond their DC plan by helping them navigate complicated financial dilemmas, questions, and challenges over the course of their working lives.
One-third (34%) of active 401(k) participants name their 401(k) provider as their primary source of retirement planning and advice, followed by a financial professional (16%), according to the research.
“Retirement investors’ financial priorities often shift from immediate saving and debt management concerns to longer-term, financial planning considerations as they progress through their careers and accumulate greater wealth,” states Shawn O’Brien, Cerulli associate director.
At a certain point, some participants will stand to benefit from a high-touch, comprehensive wealth management relationship where they gain access to more advanced financial planning services, a broader investment opportunity set, and more flexible distributions.
O’Brien adds, “Firms that establish and expand relationships with participants during their working years offer a simple, seamless transition from DC-focused asset accumulation to a more holistic, financial planning and advisory experience as they approach retirement.”
The opportunity is ripe for retirement plan providers. Cerulli estimates more than $440 billion in DC assets were rolled into individual retirement accounts (IRAs) with the help of an advisor in 2021, illustrating the addressability for sourcing wealth management business from the DC market.
The vast majority (86%) of advisor-intermediated rollover assets are through an existing advisor relationship. “For wealth managers looking to capture rollovers from DC plans, this data underscores the importance of establishing and nurturing relationships with participants earlier in their careers, years prior to potential rollover events,” adds O’Brien.
Cerulli anticipates DC recordkeeper and intermediary consolidation, along with ongoing legal and regulatory pressures, to continue to exert downward pressure on fees in the DC market, making financial planning and wealth management services increasingly attractive to providers from a financial standpoint. According to the research, the services are considerably more lucrative than pure-play recordkeeping relationships, in part because the wealth management industry has been largely insulated from the intense fee compression experienced in the asset management and recordkeeping industries.
Given the attractive economics of wealth management relative to recordkeeping and plan advisory, Cerulli anticipates more wealth managers and DC plan providers will create synergies between these two business units through mergers and acquisitions, and strategic partnerships.
O’Brien notes that, “By harmonizing their DC and wealth businesses, firms can manifest meaningful financial benefits for both franchises. Factoring in the expected ancillary revenue from converting DC participants to wealth management clients may allow firms to offer more competitive pricing on the DC side, helping them win additional mandates.” O’Brien also believes greater “coopetition” between recordkeepers and plan advisors could arise as the two parties work to serve the plan but simultaneously compete for participant rollovers.