The most aware, conscious or mindful people I know are very good at being present, listening to what others have to say without interrupting. The highest state of being comes when we see reality as it is free from knee-jerk reactions or personal biases which is the goal of the deepest forms of meditation.
But we see the present through past experiences while also thinking about and planning for the future. So as I prepared to moderate a roundtable for a client’s advisory board meeting as well as the upcoming RPA Record Keeper (June 4-5) and Retirement Income (June 18-19) Roundtables, I jotted down some thoughts about major trends affecting the 401(k) and defined contribution industry and what the future might hold. When I reviewed them with my good friend Prof. Shlomo Benartzi, he encouraged me to write about them even though to me it seemed like a rehash.
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 heard many times, I really think “this time actually is different,” which will drain the moat that insulated us from dramatic change. Those barriers include heavy rules and regulations, arcane technology and a very complicated food chain and distribution system that are not deep enough to resist societal pressures.
These pressures include:
- Shifting of retirement liability to individuals
- Greater access to payroll deducted retirement plans
- Explosion of technology and use of data
Here’s how these pressures are affecting all parts of the DC industry and food chain:
- Explosion of small plans – Due to state mandates, tax credits and PEPs, as well as the war for talent, the number of 401(k) plans along will grow from just over 600,000 in 2021 to just under 1 million in 2029, according to Cerulli, a 50% increase. There was only a 25% increase the previous nine years leading to greater interest by wealth advisors who outnumber RPAs by 23 to 1.
- Personalization – Though crude, target date funds were the first step within DC plans to personalize investments, but it is a weigh station on the road to managed accounts with personalized TDFs a pit stop. Many hurdles exist for managed accounts, none of which are insurmountable, including high fees as well as a lack of engagement and data. As we attempt to provide in-plan retirement income, personalization is critical as is helping employees pick the right mix of available benefits. If every participant is running their own defined benefit plan, we need to personalize it for each person with frequent adjustments.
- Technology – Participants and plan sponsors do not and will not compare products and services to industry standards, they will compare it to Amazon and Venmo as well as other services we get in our personal lives. And though no one knows how AI and ChatGPT will affect the DC industry, few are doubting their potentially profound effect. That puts pressure to better leverage access data while protecting plans and participants as well as providing protection against cybersecurity threats. All of which, along with the explosion of small plans, has left the door open for fintechs like Guideline, Betterment, Vestwell, Human Interest and most recently 401Go.
- War for Talent and Convergence – Before the pandemic, DC plans like healthcare were a tactical benefit with the focus on costs putting retirement plans way behind because most organizations did not pay for them directly. That changed with the war for talent making retirement plans a strategic benefit used to recruit and retain talent leading to the convergence of wealth, retirement and benefits at work. Beyond fees, funds and fiduciary, as well as compliance, plans are looking for partners to help employees with financial planning, including student loans, emergency savings, HSAs, non-qualified plans and debt management.
- Government and Lawsuits – The rise of lawsuits will only continue as more money pours into DC plans and IRAs as will greater intervention of state and federal entities through laws like SECURE 2.0, the DOL fiduciary rule and state auto-IRAs. The Feds might not just require all employers, including the gig economy, to offer retirement benefits—they might nationalize the system if the private sector does not do a better job improving retirement income for more people.
- Consolidation – With the stakes growing, only a few record keepers, RPA advisory firms, asset managers and broker/dealers will have the capital and talent to compete and survive within the retirement plan ecosystem drawing in private equity money, which will be even more demanding for results than the government.
So what does all this mean for the future of the DC industry?
- Consolidation of traditional record keepers with only a handful that have scale and unique distribution surviving as well as fintechs likely to be gobbled up by current providers.
- Winnowing of asset managers able to compete in the DC market unless they have one or more of the following: tier one target dates, indexing, a major record keeper or distribution into the wealth advisor market.
- RPAs not part of a larger shops will struggle to grow and compete leading to even more M&A while, at the same time, wealth advisors with existing relationships with small business owners and managers will do more DC business through outsourcing while leveraging the convergence and PEPs.
- Awakening of plan sponsors who will demand more from their advisors and providers resulting in greater consolidation and use of technology as well as demand for helping employees.
- Eventually, employees, more engaged either on their own or through their advisor, will put pressure not just on their employer and providers but the entire system, raising existential questions about whether 401(k)s are the right vehicle.
Ready or not, change is coming sometimes at what feels like lightning speed, which at times seems impossible to keep up with or even fathom. Advice?
… you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'
Bob Dylan, The Times They Are A-Changin' 1964
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.