Though I mostly rely on the Wagner Institute as a source of data, Cerulli’s retirement and wealth research, led by Shawn O’Brien, has become my prime source. And as I expected and have heard, the dramatic growth of defined contribution plans, especially 401(k)s, driven by government mandates, tax credits and pooled plans, is real. Which may in turn lead to increasing interest by wealth advisors looking to source new personal business.
On the other hand, while institutional consultants see a bullish market for retirement income, RPA aggregators tell a different story.
So let’s dig into the numbers.
Advisor Demographics
As of 2021, there were 11,654 RPA specialists defined by Cerulli as those with 50% or more of their revenue coming from DC plans, which is decline of 32% from 2017. Most likely, fewer advisors are becoming RPAs while at the same time wealth revenue is growing for many, pushing their DC revenue below 50%. Meanwhile, specialists’ assets have grown 61%, indicating they are moving up market and their plans are growing rapidly. They also might be able to take over plans as they grow from dabblers and non-specialists.
Dabblers, or those with 15%-49% of revenue from DC plans, grew by 10% though at 60,528 in 2021, slightly fewer than in 2019—their assets grew 41% over four years. Though not trying to become specialists, dabblers see the value in managing DC plans to augment their wealth practice with uncorrelated revenue sources.
Non-specialists or blind squirrels at 216,373 advisors are not increasing their DC presence and assets grew slightly mostly due to the markets.
Wealth Advisors
No surprise that the No. 1 way to incentivize wealth advisors to do more DC business is to help them cultivate wealth management clients from these plans followed by assisting them to source new DC plan clients. These advisors need help and even spoon feeding. They also become interested when current clients forced to start a plan reach out. Once they get a taste, these advisors will be open to more DC plans though only a few become specialists.
Fiduciary Trends
While more specialists act as 3(38) (20%) or 3(21) (48%) fiduciaries with only 9% using a third party, only 12% of non-specialists act as a 3(38) or 3(21) fiduciary with 51% using an outsourcer. Dabblers are squarely in the middle with 21% acting as a 3(21) investment fiduciary and 14% as a 3(38) and 21% leveraging a third party. Wealth advisors want both plan administration and fiduciary support.
Retirement Income
The institutional and RPA worlds are a tale of two cities.
Consultants report that 33% of plan sponsors are actively seeking to retain assets compared to 8% for RPA aggregators, and another 41% of institutional plan sponsors prefer to retain the assets compared to 26% for the retail plans with 39% preferring that participants roll their money out of the plan compared to just 9% for larger plans.
Target dates and managed accounts are the preferred media for retirement income products led by TDFs with a retirement income vintage (46%), managed accounts (25%), TDFs with annuities or guaranteed income (21%) and advisor managed accounts (18%).
Conclusions
Specialists or RPAs are racing to provide wealth services while dabblers, who realize the value in DC plans, need help sourcing clients and outsourcing fiduciary and administrative services as the coming tsunami of new 401(k) plans activate them, which could mean a surge in PEP formation and growth. Institutional plans will lead the way on retirement income and retail plans will wait and hopefully follow learning what works best providing a clear roadmap.
What’s needed? Technology to enable wealth advisors, better data with access to it, process simplification, training for wealth advisors and proactive home offices. Both the stakes and hurdles are getting higher as societal forces are forcing the three worlds, which currently remain siloed, to come together which include:
- Wealth advisors
- RPAs
- Institutional consultants
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.