Results of Sterling Resources’ 2012 DC Plan Provider Profitability From 2006-2012 study shows defined contribution (DC) providers’ investment in participant communications staff and educational materials—key areas of expense that impact participant retirement readiness—has grown at an average rate of 13% per year, more than twice as fast as their total expense. During the same period, provider profitability (ROR), has declined by 1.6% annually to just less than 20%.
A similar trend is evident over the more recent, post market crash period (2010-2012). Although rising participant readiness expenses have contributed to the growth in overall provider cost, lower provider profitability is primarily caused by slower growth in revenue1 due to ongoing competition for new business and the initial impact of the 2012 fee disclosure regulations.
While expenses to support participant retirement readiness have increased and provider profitability has declined, participant outcomes have improved. Since 2009, the DC industry has added an estimated 16 million participants, more than offsetting the estimated eight million participants who retired between then and year end 2012. Moreover, from 2006 to 2012 increased investment by providers in participant retirement readiness activities has helped participant balances grow at an average rate of 2.3% per year to $45,492 (including full recovery from the 24% average drop in participant balances in the 2008 market crash).
Another indicator of retirement readiness, average growth in participant and company match contributions as a percent of total assets, declined slightly over this period, but has increased 1.3% per year since 2010. The combination of focus on increasing enrollments (now estimated at 70% of eligible participants), increasing participant contributions and account balances is a clear indication these investments are paying off, and will continue to pay off in the long run.
For the adviser-serviced, smaller-plan oriented segment of the DC market, investment in participant education staff and materials has grown faster than for the overall DC market and more than 2.5 times as fast as these providers’ total revenue and expense. Profitability (ROR) has declined somewhat more than the total DC market (from 17% to 15% or -2.1% per year) as this segment experienced higher growth in total expense together with a similar decline in revenue per dollar of assets. However, compared to the overall industry’s two basis point decline in revenue per dollar of assets in 2012, the adviser-serviced segment declined seven basis points as these smaller plans have responded more dramatically to efforts of providers, advisers and sponsors to review and reset pricing coincidental with increased fee disclosure.
Notwithstanding somewhat higher fees in this segment, advisers’ and providers’ more significant investment in participant retirement readiness activities has helped participant balances grow almost twice as fast as the overall DC market (4.5% per year to an average $39,540 balance, which includes a 29% average drop in participant balances from the 2008 market crash). Growth in average participant and company match contributions as a percent of total assets remained flat over this period but has increased 1.8% per year since 2010, with an even larger 3.9% increase in 2012.
As we see it, these trends mark the beginning of a shift toward a more outcome-oriented value-added service structure, with advisers, plan sponsors, and investment managers cooperating with DC providers of all types to create a better solution for retirement security. Providers needed to make the initial investment to make this happen—they have, and all parties, especially participants, will be the long term beneficiaries.1 Provider average revenue/$assets declined 2.6%/year from 2006-2012 (49 to 47 basis points).
1 Participant Deferrals and Company Contributions as a % of total Assets
Peter Demmer, CEO, Sterling Resources, Inc. and Stephen Greenstein, Director, Sterling Resources, Inc.
Sterling Resources, a management consulting firm focused on serving the retirement services provider industry, is a provider of defined contribution plan provider profitability benchmarking services. Sterling has conducted its P2000TM DC provider profitability studies annually since 2000. Sterling’s 2012 study includes provider supplied data for 475,000 plans and 50 million participants with more than $2.2 trillion in assets across 15 discrete, DC market segments and business models.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.