Greetings and welcome to this week’s edition of 401k Real Talk. This is Fred Barstein contributing editor at WealthManagement.com’s RPA omnichannel and CEO at TRAU, TPSU & 401kTV - I review all of last week’s stories and select the most important and interesting ones providing open honest and candid discussion you will not get anyway else. So let’s get real!
Though the 2023 P&I Record Keeper annual study shows DC assets up 23% from the previous year, many experts are still expecting significant provider consolidation with NEPC’s Bill Ryan predicting 3 of the top 15 record keepers will be acquired in the next 18 months. Though record keepers get paid on assets with costs tied mostly to participants which were only up 5%, margins are still very thin and expected to get thinner as the benefits of economy of scale diminish as providers grow.
Surprisingly, 80% of record keepers are pursuing start-ups according to Cerulli and SPARK likely leveraging PEPs with 30% acting as a PPP. Ascensus had $1 billion in their PEP as of 2023 while AON, the leader with over $2.5 billion is expected to leverage soon to be owned NFP which has a significant small to midsize retirement and benefits client base. Cerulli projected almost 1 million 401k plans by 2029 while the P&I study reported over 843,000 DC plans last year.
While Fidelity and Empower are 1-2 in assets and participants, ADP and Paychex have the most plans.
For advisors, the key is finding providers not likely to be acquired as they will get blamed if a record keeper they recommend exits which can also cause a run on their client base. And as the convergence of wealth and retirement heats up as a result, in part, to declining fees, advisors need to determine who are friends and who are foes.
Is the convergence of wealth, retirement and benefits a fad as some industry and association leaders have recently suggested questioning whether advisors can realistically leverage their participant client base, most of which have limited assets?
According to three top RPAs, the level of importance of convergence in their practice is one of if not the highest priority. Not only have they integrated wealth and retirement in their practices using DC plans as a source of wealth leads, they argue that they will ultimately be judged on participant, not just plan, outcomes. And as plan level fees decline, advisors that leverage participants will be more competitive and like to grow.
Looking at the advisor M&A market, RPA Aggregators are buying more wealth practices following the Captrust lead while a growing number of RIA aggregators like Creative Planning and most recently Mariner are buying up retirement practices.
Encore Fiduciary, a leading insurer, hopes a major shift in the way fees are calculated by the 401k Book of Averages by including indirect payments will stem the litigation tide.
Previously, a $200m plan with 2,000 participants showed an average of $5/participant for record keeping fees – in 2024, that number has jumped to $97 when revenue sharing is included plus $70 for advisors.
Likely not included are the fees paid by fund companies to be on record keeper platforms and to advisory firms to get access to their reps which is a story for another day.
We all know that AI will affect and likely improve DC plans and participant outcomes but no one is sure how and what measures need to be taken to limit fraud and abuses especially in a highly litigious fiduciary world.
A thoughtful column by a leading law firm outlines the issues posing whether plan fiduciaries that do not leverage AI will be at risk while those that do may also face liability.
Should 321 or 338 co-fiduciaries leverage AI when selecting and evaluating investments incorporating plan demographic information? If they do, what are the duties of the plan to monitor? Should AI be used to combat cyber security risks and can it predict black swan events? Should AI questions be included in RFPs?
Along with plan fiduciaries, regulators are asking questions about AI with the SEC suggesting that algorithms can be manipulated to benefit advisors.
Even with the interesting move by IBM to eliminate their 401k match putting the 5% into a DB like plan, no one is suggesting that pension plans are about to make a comeback.
But the shifting of liability to participants in the move from DB to DC plans making each participant manage their own personal pension plan is changing the role of retirement plan advisors.
Read my recent WealthManagement,com column how RPAs are now becoming not just pension managers for their participants but also outsourced administrators of DC plans that had been done by internal pension professionals as many HR and finance people are thrown into the job of overseeing their DC plan with limited knowledge, training and resources.
So those were the most important stories from the past week. I listed a few others I thought were worth reading covering:
- Ascensus acquires Vanguard’s Simple & SEP business
- Head of Captrust M&A departs
- Leading behavioral finance advocate dies, leaving rich legacy
- DOL proposes voluntary reporting for its lost and found database
- Insights into the DOL fiduciary rule
Please let me know if I missed anything or if you would like to comment. Otherwise I look forward to speaking to you next week on 401k Real Talk.