The most self-aware, self-aware, or mindful people I know are very good at being present, listening to what others have to say without interruption. The highest state of being comes when we see reality as it is free knee reactions or personal bias that is the goal of deeper forms of meditation.
But we see the present through past experiences as we think and plan for the future. So, as I prepared to moderate a panel discussion for a client's advisory board meeting, as well as the upcoming RPA Recordkeeper Roundtable (June 4-5) and Retirement Income (June 18-19), I jotted down some thoughts about the key trends affecting the 401(k) and defined contribution industry and what the future may hold. When I reviewed them with my good friend Prof.
We always hear, “this time it's different” about looming areas like retirement income, but I'm usually skeptical. So when I hear or say that the DC industry is going through a radical change like never before, which we've heard many times, I really think “this time is actually different”, which will dry up the moat that isolated us from dramatic changes. These barriers include burdensome rules and regulations, arcane technology, and a highly complicated food chain and distribution system that are not deep enough to withstand societal pressures.
These pressures include:
Here's how these pressures are affecting all parts of the DC industry and food chain:
- The 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 combined will grow from just over 600,000 in 2021 to just under 1 million in 2029. according to Cerulli, an increase of 50%. There was only a 25% increase in the previous nine years, leading to greater interest from wealth advisers, who outnumber RPAs by 23 to 1.
- Personalization – Although raw, target-date funds were the first step within DC's plans to personalize investments, it is a pit stop on the road to personalized TDF managed accounts. There are many barriers to managed accounts, none of which are insurmountable, including high fees, as well as a lack of commitment and data. As we strive to provide retirement income within the plan, customization is essential as it helps employees choose the right mix of benefits available. If each participant is running their own defined benefit plan, we must customize it for each person with frequent adjustments.
- Technology – Plan participants and sponsors do not and will not compare products and services to industry standards, they will compare it to Amazon and Venmo and other services we use in our personal lives. And while no one knows how AI and ChatGPT will impact the DC industry, few doubt their potentially profound effect. This puts pressure to make better use of data access while protecting plans and participants, as well as providing protection against cybersecurity threats. All of this, along with the explosion of small plans, has left the door open for fintechs like Guideline, Betterment, Vestwell, Human Interest and most recently 401Go.
- The Battle for Talent and Convergence – Before the pandemic, DC plans like healthcare were a tactical benefit with a focus on costs, leaving retirement plans behind because most organizations didn't pay for them directly. This 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, funding and reliability, and 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 in lawsuits will only continue as more money pours into DC plans and IRAs, as well as greater intervention by state and federal entities through laws like SECURE 2.0, the DOL fiduciary rule, and auto -State IRAs. The Fed can't just require all employers, including the gig economy, to provide retirement benefits — they can nationalize the system if the private sector doesn't do a better job improving retirement incomes for more people.
- Consolidation – As the stakes rise, only a few recordkeepers, RPA advisory firms, asset managers and broker/dealers will have the capital and talent to compete and survive within the retirement plan ecosystem by attracting the money of private capital, which will be even more demanding for results than the government.
So what does this all mean for the future of the DC industry?
- Consolidation of traditional record holders with only a handful having unique surviving scale and distribution, as well as fintech likely to be swallowed up by incumbent providers.
- Acquiring asset managers able to compete in the DC market unless they have one or more of the following: Tier 1 target dates, indexation, a large record holder or distribution in the wealth advisor market.
- RPAs that are not part of a larger boutique will struggle to grow and compete leading to even more M&A, while at the same time, wealth advisors with existing relationships with owners and managers of Small businesses will do more DC business through outsourcing using convergence and PEPs.
- Awakening plan sponsors who will demand more from their advisors and providers resulting in consolidation and greater use of technology as well as demand to assist employees.
- Ultimately, more engaged employees either on their own or through their advisor will put pressure not only on their employer and providers, but the entire system, raising existential questions about whether 401(k)s are the right tool.
Ready or not, change is sometimes coming at what feels like lightning speed, which at times seems impossible to keep up with or even comprehend. Advice?
Better start swimming
Or you will sink like a stone
For the times they are a-changin'
Bob Dylan, The Times They're A-Changin' 1964
Fred Barstein is the founder and CEO of TRAU, TPSU and 401kTV.