Outside-IN

Outside-INblog

Outside voices and views for advisers

Why defined-contribution plan innovation is so slow

Plan sponsors are risk-averse, so 401(k) advisers should highlight the benefits of new concepts while trying to minimize the risk, work and costs

Feb 14, 2018 @ 10:59 am

By Fred Barstein

At a recent defined-contribution industry conference, the topic presented by one of the panels, which included an executive from a company that sponsors a large retirement plan, was "radical innovation." Before the discussion could begin, the plan sponsor warned that anyone coming to his organization suggesting "radical innovation" would be shut down before they could even present their idea.

That, in a nutshell, explains why innovation is so slow for 401(k) and 403(b) plans. Major change comes with significant risk in the view of most senior managers while providing minimal benefit — not a recipe for success.

DC plan sponsors have a "herd" mentality and try to stay as close to the middle as possible. Leaders and laggards get picked off by predators like plaintiff's attorneys and regulators. There are other barriers to change, including opinionated and vocal plan participants, as well as the lack of time and training among DC plan administrators at small and midsize companies.

And though a few specialized plan advisers might be courageous and confident enough to challenge DC clients and prospects to make bold moves, they represent just a tiny percentage of advisers who manage or get paid on a DC plan. The other advisers — even if they're aware of "radical innovation" or, to put it more mildly, "future best practices" — are more likely than not to validate the herd mentality.

Let's look at two potential future best practices, one that is experiencing great resistance and another that could be widely adopted, to understand the psyche of DC plan sponsors.

Using managed accounts as a retirement plan's default investment option is starting to make more sense for DC plans as costs continue to decline and technology makes access to participant data easier than ever. The results are potentially much better than target-date-fund investments, which rely on a single data point, retirement age.

Yet adoption is slow because increased fees are likely to cause concern among plan sponsors. There are also still questions about benchmarking results, a fiduciary concern.

On the other hand, open multiple employer plans (open MEPs) or so-called pooled employer plans (PEPs) are seeing widespread approval from lawmakers, plan sponsors, advisers, broker-dealers, record keepers and money managers. PEPs, if done right, provide lower costs, simplicity, better service and less fiduciary liability. Though still waiting for lawmakers to address some legal issues, which could really accelerate the growth of open MEPs, some groups are already moving ahead with little resistance.

So while I am becoming a big proponent of managed accounts as DC plan default options and feel very optimistic that the concept will continue to grow in popularity, I am convinced that open MEPs will dramatically change the small and midsize DC plan market much more quickly — the risks are low and the benefits are relatively high.

Compare that with the idea of managed accounts as a default investment option, which could benefit participants but potentially expose employers to more risk. Ironically, open MEPs may eventually speed up the adoption of managed accounts — they may be incorporated into the MEPs and reach several employers at once, rather than having to be adopted by each individual plan sponsor.

The best approach for plan advisers who want to introduce change — through auto features (automatic enrollment and escalation, for example), health savings accounts, managed accounts, financial wellness and open MEPs — is to highlight the overwhelming benefits while trying to minimize the risk, work and costs.

(More: New Year's resolutions for 401(k) advisers)

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.

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 30

Conference

Adviser Compensation & Staffing Workshop

The InvestmentNews Research team will present exclusive data and highlights from its bellwether benchmarking study that will identify best practices for setting and structuring compensation and benefits packages throughout your... Learn more

Featured video

INTV

Behind the scenes of InvestmentNews' Best Places to Work

Benefits and vacation policies are important for hiring top talent, but giving employees a sense of ownership in decision-making is among the most important qualities, editor Fred Gabriel says.

Latest news & opinion

Why we must create a more diverse and sustainable financial planning profession

CEO explains how, why a firm should commit to conscious inclusion.

Pope Francis wants financial advisers to work like fiduciaries

Vatican bulletin admonishes advisers who act against the best interests of their clients.

Wells Fargo sees slowdown in advisers exiting this year

The 2016 banking scandal and public relations fiasco had alienated some of the firm's advisers.

States trying to save DOL fiduciary rule appeal rejection of effort to intervene

California, New York, Oregon ask for rehearing by full 5th Circuit Court of Appeals.

Employees at best places to work focus on the person — and the fun

Employees at best places to work firms focus on the person and fun.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print