The future of your firm's 401(k).

• Author: Johnson, E. Thomas, Jr.
• Position: Includes related article

As we move into the next millennium, our retirement plans will take on a new look. Read how one forecaster sets the scene, redefining the roles of the company, the service provider, the employee and the government.

What's your share of $3 trillion? According to Dallas Salisbury, president of the Employee Benefit Research Institute, 401 (k) plan participants are foregoin as much as $3 trillion over the next 10 years because they act like savers, not investors. But many experts believe there's still time to help participants capture a significant portion of this amount and improve their retirement incom security while at the same time benefiting plan sponsors and service providers -- if someone educates the plan members.

Helping participants become investors will be the primary purpose of the next generation of defined-contribution products, particularly 401 (k) plans. Since the early 1980s, companies that offer 401(k) plans have moved from assembling (as best they could) such unbundled 401 (k) components as investments, recordkeeping, communications and payroll to asking for outside help in developing bundled solutions that will improve their plans' efficiency and either reduce costs or increase flexibility or both.

Today, the changes continue, and the latest is the consolidation of 401 (k) service providers. Access Research Inc., a Windsor, Connecticut-based retiremen plan and research firm, projects that, by the year 2000, 80 percent of the 401 (k) market will be serviced by only 10 to 15 players. The capital requirements -- for both knowledge workers and systems -- will convince most service providers to opt out of "manufacturing" and into distribution. That's why, as a plan sponsor, you'll need to choose your provider carefully in this period, or you'll risk being caught in a shift.

What's causing consolidation? Right now, the economics of 401 (k) service providers aren't working. The latest revenue and expense estimates, prepared in 1994 by ARI, show that providers are losing $75 million annually, with $700 million in revenues and $775 million in expenses, not counting asset-based revenue. And since there's already overcapacity and more capacity is being built, the consolidation is probably just beginning.

A VENDOR, A FRIEND

As a plan sponsor, your focus will be on the participant, and on the $3-trillio figure, for several reasons. First, large- and mid-sized companies could find themselves holding part of the bag. Securities and...