Outside voices and views for advisers

The upside-down 401(k) world is about to change

Parts of the 401(k) plan that are currently customized will become mass-produced, and vice versa

Aug 1, 2017 @ 9:35 am

By Fred Barstein

When industries are on the precipice of transformation, the market is ready to turn upside down.

In the early 1990s, Nicholas Negroponte, founder of the Massachusetts Institute of Technology's Media Lab, declared that media and technology were about to go through a transcendent change, which he predicted would result in devices that were wired (telephones), becoming wireless, and wireless devices (broadcast television) getting wired (fiber-optic cable).

In the next three years, defined contribution plans will go through a similar transformation, driven by new laws and technology, whereby what is currently customized (plan design, investment menus and fiduciary services) will be mass produced and what is mass produced (participant services) will be customized.

Today, most companies and organizations must create and run their own DC plans, including custom plan design, participant education and investment selection. Though they can outsource investment fiduciary services and administrative oversight to providers, each plan sponsor must still select, pay and monitor each provider.

On the other hand, most participants in the same defined contribution plan get the same plan design (deferral rates), education and advice. All target-date-fund investors born within five years of each other get the same asset allocation regardless of their financial situation.

Driving the transformational change are:

• Plan sponsors looking to lower administrative, advisory and investment fees, as well as limit liability and work

• Participants that need customized plan design, education and asset allocation

• Record keepers who want to lower distribution costs for plans sold through inexperienced advisers

• Experienced plan advisers who need to move down market as their fees get squeezed by larger plans

• Broker-dealers that want to minimize liability

• Increased fiduciary liability under the Labor Department's conflict-of-interest rule and lawsuits

When a town is small, it may not need public transportation. But, as it grows, commerce and traffic would be crippled without it. Similarly, when 401(k) and 403(b) plans were first started by larger entities moving from defined benefit plans, it made sense for them to design and run their own plans using investments from their DB plans.

But today, especially for smaller plans, it makes more sense to subsidize public transportation for employees that gets them close to home faster and at dramatically reduced costs, and then let each one get to their personal destination either by chauffeur, their own car or Uber, depending on their means.

Technology to create customized plan designs, investments and education for participants is currently available. Pending legislation, which is likely to pass, would establish pooled employer plans allowing unaffiliated companies to join a common DC plan and have limited administrative duty.

So it is not a matter of "if" the defined contribution industry will undergo drastic transformation, it's just a matter of "when." The dramatic shakeout for record keepers, money managers, advisers and third-party administrators will depend on their ability to adapt and innovate — just like for media and tech companies in the 1990s.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.


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