Though the defined contribution industry has lots of challenges and conflicts of interest that make for interesting and provocative discussions, the potential of 401(k) and 403(b) plans to positively impact the financial security of tens if not hundreds of millions of workers is real and even likely.
The DC industry is like an awkward, anxious but eager teenager with unlimited potential burdened by its past and just beginning to understand the impact it can have.
Let’s start with the challenges and hurdles:
- Tsunami of lawsuits, which only seem to be escalating
- Burdensome regulation from three major federal agencies, including the DOL, SEC and IRS, as well as state lawmakers
- Highest fiduciary liability known to law under ERISA
- Rampant conflicts of interest that will only increase as advisors and providers cross-sell participant services with advisors and providers potentially competing
- Declining plan level fees
- Unsophisticated buyers—plan sponsors and participants
- Senior management ennui
- Industry consolidation
- Data issues, especially privacy
- Cybersecurity concerns
- Clunky record-keeper technology inhibiting fintech integration
- Lack of participant engagement
- The focus on the top 3% wealthiest participants and ignoring the rest
- The dismal failure of financial wellness due to lack of engagement and viable revenue model
- Lack of retirement income solutions for many reasons starting with lack of transferability
These are weighty and real issues and challenges, but compared with the amazing opportunities and momentum for the DC industry, there is an excellent likelihood for success with enough capital to fund it.
The three most important drivers that could change the landscape include:
- The convergence of wealth, retirement and benefits at work. It’s as if the DC industry woke up from a 30-plus-year fog to realize that the DC platform is a perfect way to interact with and help workers with all financial and benefit issues, not just retirement, which, not coincidentally, has coincided with the elevation of DC plans as the major retirement vehicle for most Americans.
- Plan sponsors are getting smarter, making them better and more discerning consumers rewarding and elevating the better advisors and providers.
- The growing importance of retirement benefits moving it from a tactical benefit, where price is most important like health care, to a strategic benefit to enable organizations to retain and recruit better workers.
There are other factors providing tailwind to 401(k) and 403(b) plans, like the growing use of behavioral finance, which has dramatically improved outcomes for tens of millions of workers. COVID-19 has also been a catalyst that, among other things, has facilitated more remote services and advice.
There are other reasons to be optimistic:
- While the focus is still on the 3% that can afford traditional wealth services, if we can expand those services to HENRYs (high earners not rich yet) and the next level of investors with more efficient access in DC plans to 10%, which is imminently possible right now, we will have increased access to almost 7 million workers—a great start on the road to the next 10% and so on. You climb Mount Everest in stages.
- Technology and the implementation of artificial intelligence and use of data has exploded in the wealth market, but not in the DC market, which means the future has already been paved.
- Though retirement income has been mostly thwarted in DC plans, legislation, technology and the overwhelming need makes its future almost inevitable.
- Customized and more sophisticated professionally managed investing through managed accounts and semicustom target date funds are coming to a QDIA near you with costs declining.
- Ancillary financial benefits like emergency savings plans and student debt repayment are beginning to take hold with more to come.
- Consolidation has and will continue to winnow out weaker advisors and providers who do not have the resources, technology or talent to move the needle leaving more opportunities for those who can.
- Capital is pouring into the DC industry, which sees the potential to access 110 million accounts.
- Driven by government mandates and subsidies, DC plans could grow tenfold: California just signed legislation requiring even the smallest organization to offer a retirement plan.
- Non-ERISA plans like K–12 and government entities stuck in the dark ages serviced by limited and conflicted providers are bound to become more like traditional DC plans, just as what happened with 403(b) plans with DC advisors and providers benefiting.
- Progressive and well-funded advisory firms and providers will export their expertise and services to the rest of the world hungry to move away from pension and government funded retirement plans.
So while we can get frustrated with the pace of change burdened by weighty hurdles and challenges, it’s critical that we keep our eyes on the horizon for what is sure to be a bright future for this incredible experiment, which started out as a supplemented savings plan and has the potential to change the world.