Strong asset and revenue growth lie ahead in the not-for-profit and governmental defined contribution markets, according to new Cerulli research.
In its report "U.S. Not-for-Profit and Governmental Defined Contribution Plans 2016: Addressing the 403(b), 457, and 401(a) Markets," Cerulli found that the NFP and governmental DC market is second only to the IRA segment in projected asset growth rate, and that projected negative net flows in the 401(k) market may increase interest in the NFP/governmental DC market as a source of future asset and revenue growth.
The NFP and governmental DC segment, the report said, accounts for approximately 8 percent of the total U.S. retirement market and includes the Federal Thrift Savings Plan (TSP), 403(b), 457, and 401(a) markets. Altogether, that segment's assets are expected to grow at a compound annual growth rate (CAGR) of 7 percent and to reach $2.4 trillion by 2020.
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The 403(b) market is "highly diverse," according to the report, which suggests that "[d]istribution, client service, and marketing strategies should be deliberately crafted on a segmentby-segment basis (i.e., ERISA-covered 403(b) plans versus nonERISA-covered 403(b) plans, private versus public organizations), and also by sector—healthcare, higher education, and K-12 schools."
Each segment within the market has its own characteristics—which must be understood in order to achieve success and credibility, particularly since each segment also presents unique barriers to entry, as well as particular drivers of asset growth.
In addition, 403(b) plan sponsors look to advisors or consultants—almost two thirds do so—and survey results are pointing to a potential increase in this number as well as a possible desire for additional guidance in managing their plans. In the $25 million to $99 million and $100 million and greater plan asset segments, some plan sponsors intend to hire an advisor or consultant in the next 12 months.
Advisors and consultants who want to gain entrée into this market, according to Cerulli, should "be prepared to demonstrate 403(b) plan-specific knowledge and not-for-profit expertise." One peculiarity of the 403(b) market that separates it from the corporate DC market is its multivendor environment. A 2016 Cerulli survey found that more than half of plan sponsor respondents "cite participants' preference for having a choice among vendors as the primary reason for the arrangement."
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