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How Fintechs Could Take Over the 401(k) Industry

It’s going to take disruptors, not politicians and regulators, to develop creative solutions.

At a recent industry gathering to discuss how record-keepers could share data, I was struck by a few things—not to mention the fact that the industry has been trying to figure out how to solve this problem since 2008 with little to no progress.

But what really hit me is that product innovation in workplace retirement plans is controlled by risk managers, lawyers, lobbyists and lawmakers. Plan sponsors have little motivation to be truly creative with onerous and complicated laws and regulations as well as 200 lawsuits filed in the past two years.

There is no one looking out for participants pushing for creative and innovative solutions that help them save and spend more wisely. The workplace is the obvious place for additional help as there is more access and trust at work than the B2C market, which is why Empower Retirement bought Personal Capital.

And though there is more fiduciary protection for investors at work, it comes with more liability too. While the onslaught of lawsuits has netted Schlichter Bogard an estimated $400 million, it has not hurt the bottom line of the defense bar either who are not above using fear and paranoia to justify their growing fees and control. And it has resulted in lower fees and more mindful fiduciaries.

Lobbyists thrive on chaos and uncertainty, and at times when there isn’t any they create them to keep themselves relevant. Established providers who have massive distribution networks have an incentive not to change the rules of the game they are winning. Would you?

So what’s the solution?

I always have hope that retirement plan advisors will be the advocates for change and innovation, but most are reactive and careful not to frighten plan sponsors who hire and fire them, even if it’s to the detriment of the workers.

The answer is the financial technology industry, which is already happening, though still very slowly.

Vestwell is creating a microcosm that provides access to all participant data. FeeX (now Pontera) allows advisors to actively manage the defined contribution accounts of clients without permission of their record-keeper, though one larger one who has ambitions of their own is rumored to have blocked these efforts. Maybe they know better what’s good for the participants. Morningstar is tackling investment personalization through managed accounts, and Annexus, which has focused on life and annuities, is trying to develop new solutions for in-plan retirement income.

But that’s the tip of the iceberg.

There are 10 to 20 times more technology solutions available to wealth management advisors than RPAs, in part because most record-keeping technology is so archaic and unable to significantly upgrade without shutting down for a while.

Fielding Miller once commented at an industry roundtable, “When ‘fin’ meets ‘tech’ regulations get in the way.” It’s much worse with DC plans where the DOL, SEC and IRS, not to mention Congress, the president of the United States and state lawmakers and regulators all have some jurisdiction.

Deals like the recent Vanguard/American Express partnership offering card members financial advice will only increase. More financial services are being embedded into popular apps, which will be another back door into the workplace.

It took outsiders like Elon Musk to change the automobile industry and Jeff Bezos to upend retail box stores.

So while there is much opportunity for solving financial problems at the workplace, real innovation and creativity will not be driven by lawyers, risk managers, lobbyists and record-keepers, where maintaining the status quo and conflicted self-interest still reign supreme. And it likely won’t happen inside the Beltway.

We should encourage and welcome tech disruptors if we cannot do it ourselves.

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

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