In the last RPA Recordkeeper Roundtablethe focus was on how to handle it explosion of new 401(k) plans, especially smaller ones, the lure and welcome of wealth managers, and the cost and opportunities with the technology. With rates stable or falling and the cost of technology and labor rising while demand for service increases, what can providers do to compete and maintain healthy margins.
There was little talk of consolidation, although no one disputed that it would continue, and no discussion of big tech firms like Amazon or Facebook swooping in to take over, although the group acknowledged that customers compare the service and technology they get from companies to the consumer, not the 401(k) provider. AND growing number of fintech record holders driven by private equity aren't looking to disrupt—they're looking to partner and collaborate with incumbent providers, payroll companies, and benefits firms.
Current high-touch systems built on outdated technology and processes may not work with smaller plans and start-ups and may eventually be replaced by much larger ones. As data custodians and advisors seek additional revenue from participants, the need for data and collaboration increases.
The current ERISA 401(k) and 403(b) system is the most complicated financial service sector because multiple, unrelated parties must come together to provide a seamless service, often establishing revenue-sharing schemes, some transparent. and some hidden, in a highly regulated and secretive system. contentious environment.
The future, whether brilliant or dire, depends on whether firms can develop deeper collaboration, including a willingness to partner rather than build, new technologies and processes, and a way to securely leverage data. participants enabling people.
Note keepers
Data custodians are the foundation as platforms from which all services are delivered that require large capital investments and large workforces similar to airlines. They need people – internal and external – in the form of wholesalers, advisors and TPAs. No doubt the drive for more efficiency will negatively impact some, but their need will not disappear as technology cannot replace relationships, institutional knowledge and hand-holding, although it will augment and enable them.
Although one major record keeper is said to have set aside $500 million to build a new, proprietary record-keeping system, most others will increase partnerships with fintech and wealth technology firms. Few record holders like Fidelity, and the rumored provider working on a new system, will build more than a partner because they believe it's an advantage others can't replicate. While it is more efficient for one provider to act as record keeper, asset manager and distributor, those days are long gone.
Technology Firms
Fintech data custodians have the luxury of building new systems on the cutting edge of technology, deploying more efficient processes and securely delivering data by incorporating outsourced technology.
Fintech and wealth technology providers will be key to serving smaller plans and less affluent participants. Payroll providers like Paychex are unique—by necessity, they've built simple processes to keep costs down. Not only do they have the luxury of payroll integration, providing access to plan and payroll data, but they also have relationships with hundreds of thousands of organizations with massive sales forces.
People
This brings us to people who are difficult, if not impossible, to replace, while being more costly and difficult to manage, each with their own challenges.
Wholesalers are the face of record holders acting as ambassadors, many with deep relationships and institutional knowledge. Although providers often seek to cut compensation and headcount, wholesalers will never be completely replaced as long as providers rely on distribution consultants. DCIOs should leverage their wholesaler-retailer crowds to reach beyond the RPSH specialists where they currently focus.
Each segment of advisors and their home offices offers different opportunities and challenges. RPA specialists interested in serving smaller plans will need help with group plans, streamlined processing and outsourcing, as well as access to data and technology to serve participants. Wealth managers and their home offices need partners to do the heavy lifting of plan administration and servicing, taking on fiduciary responsibility so advisors can focus on business owner relationships and attractive participants like HENRY's.
Non-proprietary payroll providers are essential partners leveraged by many fintechs like Guideline to grow alongside benefits and P&C brokers. Many plans will be sold directly as many smaller business owners do not have an advisor.
The role of TPAs will only grow to serve smaller plans sold by both RPAs and asset managers, allowing recordkeepers to outsource much of the high-touch service model, reducing costs even as they must integrate them into their own systems providing access to expensive technology. Although plans may charge more, it's a choice if they want high-touch service as well as those who want customization.
Can the defined contribution industry come together to collaborate, leveraging fintech and emerging technology such as AI, while securely accessing data and enabling people, both internally and externally, to incorporate simpler processes ? It's an existential question for many that will drive further consolidation, creating more ladders for winners as some view the future with dread while others see only opportunity.
Because if the industry doesn't bend and adopt changes, at some point big tech firms like Amazon, Google, Apple and Facebook, likely frustrated with the level of service and technology they're getting from their current providers, will create the systems of their for employees. , which they can offer to existing customers and users at lower costs, as payroll providers do today, seamlessly integrating independent and local service providers as retirement planning becomes mainstream.
Fred Barstein is the founder and CEO of TRAU, TPSU and 401kTV.