Corner Office Views | Q3 2022

U.S. Wealth Management and Defined Contribution: Converging?

DC providers are positioned to advise clients

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Key Points

  • Providers can create synergies between their defined contribution (DC) and wealth management franchises to transition DC participants into more comprehensive, lucrative financial planning and wealth management relationships.
  • 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 addressable market for sourcing wealth management business from the DC market.
  • As larger, influential DC plan advisory firms continue to prioritize their wealth management initiatives, Cerulli anticipates “coopetition” between recordkeepers and plan advisors, in which the two parties work together to serve the plan, but simultaneously compete for participant rollovers, will increase.

Authored by

Shawn O'Brien, CFA

Shawn O'Brien, CFA

Associate Director

Bio →

Shawn O'Brien, CFA

Shawn O'Brien, CFA

Associate Director

Shawn leads the U.S. Retirement research practice, which focuses on the defined contribution (DC) and individual retirement account (IRA) markets. He also leads and supports strategic consulting projects for asset managers on their DC-related market entry and product distribution strategies.

Prior to joining Cerulli Associates, Shawn worked as a Research Associate at Harvard Business School, where he co-authored case studies on investment management for professional and personal investors and managing and innovating in financial services. Prior to that, he worked in the Currency Management group at State Street Global Markets, employing currency overlay strategies for large asset managers and asset owners.

Full biography here.

From plan provider to wealth manager

DC plan providers are uniquely positioned to help retirement investors navigate complicated financial dilemmas, questions, and challenges at each stage of their working lives. Data from Cerulli’s 2022 401(k) Participant Survey show 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%).

DC providers that help participants tackle financial wellness and planning challenges at various stages of their careers are advantageously positioned to foster deeper, more holistic relationships with participants, which may ultimately develop into comprehensive wealth management relationships.

Lucrative wealth management

Wealth management relationships 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 other areas of the asset management and retirement industries. As a result, several DC recordkeepers, retirement aggregator firms, and traditional wealth management firms are seizing opportunities at the intersection of DC and wealth management by creating synergies across these two business lines, sourcing wealth management relationships from their DC plan clients.

Cerulli anticipates ongoing DC recordkeeper and intermediary consolidation.

Some firms have signaled their intentions to create synergies between these two business lines through high-profile acquisitions. For example, Creative Planning, a wealth-management-focused registered investment advisor (RIA), gained inroads into the DC space by acquiring Lockton’s retirement business in 2021. Empower, the second-largest DC recordkeeper by DC assets under administration (AUA), signaled its entry into the wealth management space by acquiring Personal Capital in 2020. The following year, Empower announced that it would hire 325 employees for its retirement solutions group, which houses its IRA and brokerage units. For other retirement plan providers, such as Fidelity and Schwab, financial planning and wealth management has long been at the core of their business.

Cerulli anticipates ongoing DC recordkeeper and intermediary consolidation, and legal and regulatory pressures will continue to place downward pressure on fees in the DC market. As a result, wealth management will likely become even more attractive from a business strategy standpoint.

Coopetition: recordkeepers and plan advisors

Aggregators are widely viewed as the key plan-level decision-makers in the DC mid-market and, through acquisition and organic growth, have captured a substantial share of the DC intermediated assets—the top-10 retirement aggregator firms collectively advise on more than $1 trillion in DC assets. As such, aggregator initiatives to create synergies between their DC and wealth businesses pose a potential threat to recordkeepers that offer wealth management services.

The challenge for recordkeepers is determining how to navigate relationships with aggregators when it comes to working with higher balance participants and capturing rollovers. On one hand, recordkeepers will, in some cases, need to satisfy aggregators’ home-office personnel and field advisors to win and retain DC mandates, since, at an individual plan level, aggregators are often helping plan sponsors monitor and select their recordkeeper(s).

Recordkeepers should be prepared to negotiate reasonable compromises on which participant demographics (e.g., retirement assets, investable assets) each party should target as potential rollover clients.

However, sacrificing rollover opportunities to placate the aggregators and maintain the plan may not yield desirable financial outcomes either. In many cases, a middle ground between the two providers will exist. Rather than ignore this inherent conflict of interest, Cerulli recommends recordkeeper initiate direct, constructive conversations with aggregators and plan advisors to address their respective approaches to capturing rollovers. If necessary, recordkeepers should be prepared to negotiate reasonable compromises on which participant demographics (e.g., retirement assets, investable assets) each party should target as potential rollover clients.

Tiered service models and digital advice solutions

In situations where aggregators are engaging with the higher balance participants in a plan, recordkeepers should consider employing a tiered wealth management service model (based on the investor’s household investable assets) to serve mass-affluent and middle-market rollover clients who fall a tick below the plan advisor’s purview. For instance, Fidelity offers its Wealth Management services to investors with at least $250,000 in investable assets and Private Wealth Management for investors with at least $2 million in investable assets. Similarly, Personal Capital (now part of Empower) offers a three-tiered approach: Investment Services for investors with $100,000 to $200,000 in investable assets, Wealth Management for investors with $200,000 to $1 million, and Private Client for investors with more than $1 million.

Although digital advice solutions have struggled to gain substantial assets, providers can leverage scalable digital advice solutions (robo or hybrid advisory services) to serve less affluent participants (or participants who are unwilling to pay the higher fees associated with a traditional wealth management relationship). For example, Vanguard Portfolio Advisor Services (PAS) offers personalized financial planning, investment advice, and access to an advisor for a minimum investment of $50,000 and only 30 basis points.

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