The 401(k) industry is complicated. Multiple vendors must cooperate, with each one adding its own levels of complexity and competition. There are multiple clients, each with different needs and interests. Technology is clunky. Much of the data are either unavailable or inaccessible.
Regardless, the entire participant-directed payroll-deducted industry is hot and evolving rapidly, with outside investment, government oversight and media attention reaching all-time highs. Maybe $10 trillion in assets and 90 million participants are hard to ignore. It’s as big as $20 trillion if IRAs are included.
Due to COVID-19 restrictions, the InvestmentNews RPA Roundtable and Think Tank events were held virtually, over six weeks. Those events included:
1. Chief investment officers (Oct. 29-30)
2. Broker-dealers (Nov. 30-Dec. 1)
3. Aggregators (Dec. 8-9)
4. Record keepers (Dec. 14-15)
Because senior executives in charge of strategy attended, the programs provided valuable insight into the future of the 401(k) industry. Recaps of each of the four events were published, and some themes reverberated throughout.
As fragmented industries mature, consolidation is inevitable, and most groups see that as both an opportunity and challenge. Those firms with capital, focused acquisition strategies and culture felt well positioned to take advantage of increased scale. Others not able to compete, mostly because prices are so high, were concerned.
All groups recognized the opportunity and challenge to help participants saving for retirement at work. The ability to provide integrated wealth management, retirement income and benefits to plan sponsors and their participants is what’s driving capital to the industry. But the challenges are daunting, ranging from data access, technology and how to serve the constrained investor who cannot afford traditional financial planning.
With more state and federal initiatives to make retirement saving at work accessible, the question is whether current providers can meet the challenge to serve all participants, not just the wealthy ones. Because if they cannot, the concern is that a tech giant like Amazon might give away plan-level services to their business partners to access their workers.
As each group fights for more revenue from existing clients, competition is inevitable, especially with outside investors fueling industry consolidation. Though record keepers depend on advisers to bring them clients and drive engagement, who owns the relationships with participants in those plans?
All sectors had to scramble to serve clients and manage staffs remotely when the crisis hit. Those with scale did better. All groups agreed that many practices that had to be deployed during the pandemic are working well, with the hope they can continue. But few firms expect to have all employees working 100% remotely, and those with significant relationships, books of business and resources will benefit more than those still trying to establish themselves.
New state and federal laws and regulations were expected and mostly welcomed, as retirement seems to be one of the few bipartisan issues. However, broker-dealers struggle just to keep up with all the new notices and requirements. Pooled employer plans represent a major opportunity for all sectors, especially for record keeper and aggregators. Retirement plan litigation is expected to continue, and record keepers appeared to be the most concerned.
Advisers face two important lines of questions about their future in the DC business:
1. Do I want to participate? If not, do I sell, partner or do nothing?
2. If I do want to engage, with whom should I partner? Which record keeper, broker-dealer, aggregator or money manager will thrive?
The focus on retirement is growing worldwide. Employers and employees are expecting more financial solutions at work. The U.S. DC industry is at a crossroads, driven by the pandemic, new laws and convergence, all of which will result in massive consolidation. Advisers have tough decisions to make, but doing nothing is no longer an option. Choose wisely.
Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ RPA Convergence newsletter.
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