403(b) Changes Mean Altered Provider Landscape

June 8, 2009 (PLANSPONSOR.com) - Labeling the 403(b) space "arguably the most dynamic retirement market sector," a new report by two research firms predicts the pace of transition and turnover by 403(b) providers is likely to pick up in coming months.

“Retirement Market in Focus,” released by RG Wuelfing and Associates and Retirement Research Inc., notes that “marginal providers” have already exited from the 403(b) custody business or at least the multivendor 403(b) space and anticipates that will increasingly be the case (see  The New 403(b) Model: Exclusive versus Multiple Vendor Programs ). In the next year or two, more providers will likely get out, outsource, or stay and acquire 403(b) competitors, the report asserts.    

The size of the roster of 403(b) providers is also being driven by plan sponsor moves to cut back their vendor lists or move to a single provider as a result of new 403(b) rules, the report says.   

Changing Adviser Role

The Wuelfing/Retirement Research report also contends that increasingly complex market trends will make it impossible for financial professionals to dabble in the retirement space.

“Such factors as growing regulatory complexity, fiduciary requirements and the attendant exposure, adviser compensation transparency and the move to a fee-based compensation model, open architecture and provider consolidation have conspired to greatly favor the retirement plan specialist—the “heavy” adviser whose business model may hardly be distinguishable from that of the traditional fee-based vendor selection consultant,” the report states.

The changing role of advisers will also drive a simultaneous change in the wholesale channel.

Wrote the study authors: “We think the combination of changing adviser needs and serious pressure on provider margins will conspire to generate major changes in distribution strategy, structure and resources in the years immediately ahead.”

Finally, the report said retirement service providers are mindful of the rapidly changing rulemaking/legislative landscape regarding fee disclosure (see White House Executive Order Snares Fee Disclosure,  Advice Regs   Legislators Introduce 401(k) Fee Disclosure Bill, Hear Testimony ).

"While the competitive drama in Washington between the DOL and Congressional interests continues to play out (we imagine it will be 2011 before service providers need to be in compliance with whatever finally evolves), plan sponsors and their advisors are increasingly treating full fee disclosure as a practical given—certainly in the mid through large plan markets and increasingly in the smaller plan market as well," the report states. "Naturally enough, service providers are accommodating those needs, though being careful about making systems investments pending the legislative/regulatory dictate."

Information about ordering a copy of the report is available here .