The defined contribution industry is rife with the potential for advisers and providers to exploit the convergence of wealth, retirement and workplace benefits. And while there are few skeptics, there are also few counselors and providers able to fully participate.
So is convergence a fad that will only benefit a select group, and not really, as we've seen with retirement income, or will it determine the winners and losers in the DC world?
The case against
The reality is that few providers have a brand or consumer capability, while most participants don't even know who their holder is. It's even more difficult for advisors who don't have the benefit of a website and branding statements and have much less access to participant data. Additionally, most do not have the capital to invest in branding, technology, or building call centers.
That's why only 10% of returns go to a new advisor, while advisors with existing relationships get 54%, according to Cerulli, in 2023, rising from 2021, and top-up account balances average $200,000 compared to just $144,000 for new advisors. Why? Participants with existing advisor relationships have more assets.
This is why most wealth advisors avoid 401(k) plans.—Fees are low and only going down, while ERISA liability is high and only going up. Most wealth advisors only want to work with high net worth clients, which are few and hard to find within DC plans.
The promise of financial well-being is still a dream for many, as is the provision of scale advice with major obstacles such as:
- Lack of high-quality data and privacy issues
- Archaic data keeper technique
- Advisers not adopting AI with compliance concerns
Few RPAs that have access to tens of thousands if not millions of participants have stable asset stacks or capabilities, most are still stuck in the Triple F world focused on scaling plan level service. Talk of convergence is uncomfortable and generally met with denial and skepticism.
The convergence of workplace benefits is even more difficult, which has been mostly at the plan level as many benefits and P&C firms have built or acquired pension advisors hoping to cross-sell.
Case For
Shining is the immense opportunity of over 110 million DC accounts with approximately 80 million participants and $11.3 trillion, of which only 3% have a relationship with a financial advisor. Over 50% of wealth is hidden in the workplace, the best place to find it, which, according to Morgan Stanley's James Gorman, will be his firm's biggest source of new assets over the next decade.
According to a 2023 Fidelity Investments survey, one of the top priorities of plan sponsors is getting financial help and advice to employees, not just high net worth. Although the war for talent is winding down after a historic frenzy, DC's blueprints have become a key weapon to retain and recruit.
Schwab's recently released study of 1,000 401(k) participants shows that 61% want and need advice, up from 55% in 2023, with many expecting it from their DC plan provider or advisor—61% are satisfied getting advice from AI or ChatGPT though more ( 60%) would follow a human compared to just 19% for robos.
So, along with the opportunity and high demand from clients, advisors and providers can increase relationships with plan participants in the plans they manage as plan-level fees drop and services are commoditized. The opportunities with participants are why PE firms continue to invest and raise the valuations of record holders and advisory firms.
Still not convinced? The top RPA firms are maniacally focused on the bridge to wealth, led by Captrust, which has been tilting for nearly a decade, buying more RIAs than RPAs as other RPA aggregators scramble to catch up. Meanwhile, major RIA aggregators like Creative Planning and Mariner are adopting retirement practices, and institutional investment consultants are trying to engage smaller plans through PEPs and participants through digital advice.
Let's not forget the demographics of 10,000 baby retirees every day, HENRY (high-income yet not rich) where advisors manage to build relationships before an event and skepticism about Social Security's sustainability. The drumbeat for in-plan retirement income continues, with 43% of participants in the Schwab study indicating they expect to receive income from their 401(k) plan.
And while most wealth managers don't intend to focus on DC plans, according to Cerulli, more than 60,000 advisers receive between 15% and 49% of their income. Don't forget the expected explosion of DC plans due to state mandates and tax incentives facilitated by PEPs resulting in wealth advisors having business owners or managers as sought-after clients to help or allow another advisor into the mix.
Benefit and P&C firms are also leaning in, hoping to sell their services, which are far more profitable than DC plans, to the organizations their RPA firms work with, which tend to be larger.
So is the convergence of wealth, retirement and workplace benefits real? And will providers and advisors, along with their industry associations, who are unwilling or unable to participate, be able to keep the focus on plan-level services and the discussion within the 401(k) echo chamber )? I'm not a betting person, but if I were, I'm pretty sure which way I'd go. How about you?
Fred Barstein is the founder and CEO of TRAU, TPSU and 401kTV.