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!
The DOL’s most controversial rule with the longest tail has hit another setback with Republicans in both houses joined by Democratic Senator Manchin attempting to derail the fiduciary rule through the Congressional Review Act. Though not likely to succeed as President Biden would have to sign it, that could change if Republicans win the Whitehouse. If derailed, the courts will be the most likely avenue.
The rule is quite sweeping with critics like Brad Campbell, former DOL EBSA Director and partner at Faegre Drinker explaining in a recent webinar with colleague Fred Reish that the DOL may have overstepped their bounds. The controversy is largely over IRA rollovers with most activity by advisors or insurance agents considered to be fiduciary advice.
What is most striking is how the rule could affect brokerage firms and insurance agencies as organizations that are found to have violated the new rule receiving what Fred & Brad called, “the death penalty” prohibiting them and their reps from working on rollovers for 10 years. Though insurance agencies that work with independent reps will not be fiduciaries, they will have to annually oversee their agents.
The existential question is whether firms should start preparing to comply with some provisions effective September 23rd or take their chances and wait to see if the courts either negate the rule or issue an injunction.
Though the conclusions of the whitepaper by Cerulli sponsored by Edelman Financial Engines about managed accounts, gleaned from three focus groups and surveys with 823 401k participants, were predictable, there were some interesting insights about the need for advice and how to provide it at scale.
Only 16% of participants without access to a managed account were very confident of their investment strategy compared to 47% that did have access. Predictably, participants were very confused about how TDFs, managed accounts and other investments work.
Half of the participants said that talking to a financial advisor is the most valuable aspect of financial advice. The main reasons that most participants do not reach out to an advisor is that they do not think they have enough assets and are concerned about costs.
So the real question is whether managed accounts in and of themselves provide a viable means to cost effectively provide advice, in which case the current pricing can be defended, or whether it is a just tool used by advisors to scale advice and increase engagement. Because currently, the results of participants in managed accounts compared to TDFs do not justify higher fees and have relatively low usage.
Pontera continues to win more advisory firms for their service to enable advisors to manage clients’ 401k accounts with Stiffel the latest covering 2400 reps and 200,000 clients announced at their national conference by their CEO. This follows recent similar announcements by Commonwealth and Captrust.
To provide holistic advice, wealth advisors must incorporate 401k assets but the means to do are less obvious. Individual advisors or firms receiving clients 401k plan credentials is not realistic in today’s environment with hypersensitivity about data privacy and cyber security so outsourcing to a “cybershield” provider like Pontera makes sense though there will be hurdles to overcome with regulators and record keepers as the services becomes more ubiquitous used by high profile advisory shops. Look for RPAs to also use the service with record keepers unwilling to share participant data.
We all know AI and ChatGPT is coming to the rules based and overly complicated DC industry but few are sure how. One large benefit consultant shared how the technology is being deployed by HR professionals for benefits.
AI is being used to create content, especially during open enrollment to explain insurance plans, coverage and costs as well as ways to personalize the benefits which can be adjusted throughout the year leveraging data analytics. Additionally, AI can be used to reduce work for call centers and HR professionals.
Imagine if DC participants and their families received an introductory video about the plan and the benefits when they join an organization plus additional reminders throughout the year as new features are added (like managed accounts) or there are changes to the participants situation (marriage/children) inviting them to provide additional information which will increase engagement. It is not far fetched.
We always hear, “this time it is different” about impending areas like retirement income, but I am usually skeptical. So when I hear or say that the DC industry is going through radical change like never before, which we have often heard, I really think “this time actually is different” which will drain the moat which insulated us. Barriers include heavy rules and regulations, arcane technology and a very complicated food chain and distribution system which are not deep enough to resist societal pressures.
Read my recent WealthManagement.com column about these pressures which include:
- Shifting of retirement liability to individuals
- Greater access to payroll deducted retirement plans
- Explosion of technology and use of data
- And how these dynamics will affect advisors, plan sponsors, record keepers and asset managers.
So those were the most important stories from the past week. I listed a few others I thought were worth reading covering:
- Vanguard appoints former BlackRock exec CEO
- States are partnering to provide auto-IRA programs
- Goldman wins $43 billion OCIO mandate
- SEC announces rule requiring advisors to alert clients about data breaches
- BlackRock’s head of retirement departs
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.