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401(k) Plans Are Free

But what are the real costs?

More than 20 years ago, it was common for 401(k) record-keepers to inaccurately claim plans to be free. What they meant was that the employer was not required to pay anything out of pocket. Fee disclosure was not required and few plan sponsors knew or cared about how much participants would pay through revenue sharing and wrap fees.

Those days are practically over, but with the passage of SECURE 2.0 and state auto IRA plans as well as the growing use of group plans like PEPs, companies without a retirement plan may be able to offset most of the administrative costs or avoid them all together with SECURE’s Starter K Plan.

While not really helping existing plans, which, by the way include SEP IRAs and SIMPLE plans, the state and federal programs make it much more attractive for companies to start a payroll deducted, participant directed retirement plan. As a result, there could be a flood of new plans over the next three to five years that could stress the current system and force providers and advisors to adopt new business models, something neither has been able to do effectively.

Currently, the business model for the almost 700,000 DC plans with $9.3 trillion that feed the $11.7 trillion IRA market is asset based with costs based on the number of participants and plans. The fewer the plans and the higher the account balance, the greater the profit.

Fees continue to decline for providers and RPAs alike, something that will continue until excess capacity is extinguished, which will happen through consolidation. That is why providers and advisors are desperately looking for ancillary revenue from participants in plans they manage.

As a result of SECURE 2.0 and in states with mandates for companies that prefer private options over the auto IRAs run by the government, there will be potentially millions of new plans with low account balances that could stress or blow up the current DC ecosystems.

Experienced RPAs will struggle to profitably serve these smaller plans. RIAs currently are not attracted to DC plans, even if their clients run or influence them, for many reasons. So who will sell and service these startup and low-balance plans?

Traditionally, plans are sold, not bought. Even in states with mandates, companies look for an advisor to help whether an RPA, RIA, CPA, benefits broker or payroll vendor. Payroll providers like Paychex and ADP have created a business model to serve this market and others have partnered with fintechs like Guidelines, Vestwell and Human Interest.

But traditional record-keepers, even those with a small market presence, struggle to fit small plans into their asset based, relatively high-touch business models, especially if they are doing well with larger plans.

PEPs or GOPs could help providers and advisors scale smaller plans, but fundamentally both will need to create a new business model hard with systems built on 1990s technology, which is difficult to change.

Is there a silver bullet? Providers who have traditionally relied on RPAs may need to create new distribution networks and RPAs may need to partner with nontraditional providers. Leveraging participants in the plan, even just the HCEs, is still a pipedream for most RPAs.

Firms like Envestnet and Bidmoni are working with broker/dealers to help make plan formation easier for RIAs through technology and outsourcing while Pontera is trying to make it simpler for advisors to manage clients’ DC accounts, though the cybersecurity risks have many very concerned.

Regardless, the wave of new plans is likely. Some providers and advisors will be overwhelmed, some will run for cover while others see a massive business opportunity. Which one are you?

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.

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