Convergence of Wealth and Retirement Driving Change
Record keepers, asset managers and tech companies spend tens of millions of dollars annually on market research and product development, looking to find the next great thing for defined contribution plans. But there are much simpler ways to determine whether a product or service category will resonate.
In the $3 million to $250 million 401(k) and 403(b) space, where retirement plan advisors and hybrids dominate, change is not driven by plan sponsors. The front-line professionals have 10 jobs and little training, and most senior managers are not focused on their retirement plan, relying primarily on their advisor.
So what drives advisors to suggest and implement new products or services?
Though most RPAs and hybrids want to help clients especially to improve participant outcomes, that is not a main driver. If so, HSAs, emergency savings plans and student loan debt-repayment programs would be more popular. HSAs are arguably the best deal in town, especially if used properly with triple tax savings, but there is one problem—advisors do not get paid. Same with retirement income, which arguably hurts advisors that want to capture rollovers —private investments will not boost advisor revenue either, especially with the move to flat fees.
Along with the ability to make money, advisors are driven by two other factors:
CITs are an example of competitive advantage—an advisor who offers a similar investment for 30% to 40% less than the mutual fund has a huge advantage in a world focused on fees.
An example of client demand is an advisor’s ability to meet with and help participants with their holistic financial issues— they also want to streamline processes like payroll integration, as well as help manage record keepers, TPAs and technology. In other words, be the steward or quarterback of the plan.
Rollovers and managed accounts are ways for advisors to make money while helping participants, if done right. Financial plans are the gateway to outside assets. The auto plan and target date funds facilitated by laws and regulations were a competitive advantage and increased advisor revenue, which eventually clients demanded.
But new laws and regulations alone do not change advisor behavior, as seen with HSAs and others, and with retirement income, which SECURE 1.0 made safer through the recent DOL investment rule, making it easier to implement. Laws can help or hinder, but they will not be the main driver. Auto features and the dramatic TDF usage required a safe harbor through the 2006 PPA—though PEP usage is growing and should encompass 10% to 15% of plans within five years, they needed SECURE 1.0 to eliminate the one bad-apple rule and allow for a single 5500 filing.
Triple F services had been a differentiator but have become commoditized with tech and artificial intelligence able to benchmark investments, co-fiduciary status offered by firms like Mesirow and Morningstar for less than 5 bps, and fee reduction through CITs and index funds, as well as benchmarking and RFP of record keepers offered now by most advisors, facilitated by tech firms like Catapult, the leading RFP service.
It’s different with health care and benefits, where Triple F services are rare and serve as a differentiator, just as they were for DC plans 20 years ago. Though it’s unlikely that many RPAs or wealth advisors will become benefit brokers or fiduciary benefit consultants, those that have some understanding of the issues and partner with brokers like-minded have a competitive advantage.
All of which is why convergence of wealth and retirement and eventually benefits wins the Triple Crown:
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Advisor revenue and profit margins increase dramatically
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Those who meet with and help participants have a competitive advantage
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Plan sponsors and participants are demanding it
Convergence is not the most important or hottest trend— it is the inherent purpose of retirement plans to facilitate better outcomes and integrate wealth, retirement and benefits at the workplace to provide peace of mind and a competitive advantage to organizations, which will not only be able to recruit better workers and retain more of them longer, the companies will be more productive with a loyal and grateful work force. What “trend” does that?
