As outlined in my recent column, "Here's how the 401(k) world will evolve over the next three years," the adviser-sold 401(k) and 403(b) markets will experience rapid change in the next three to five years. So what are the key drivers, and how should plan advisers prepare to grow and thrive amid these potential changes?
The three biggest drivers of change for the 401(k) market, similar in some ways to other industries like health care, benefits and wealth management, include:
• New laws and litigation
• Margin pressure
Given these factors, plan advisers would do well to take into account the changing needs of employers as they figure out how to evolve their practices.
While benefits in general and retirement specifically are becoming more important to employers, especially given historically low unemployment rates, it's important to realize that they would rather not be in the benefits business at all, just as advisers would rather not deal with compliance.
When it comes to retirement benefits, what employers really want is nothing — no cost, no work and no liability. These desires are the foundation all of their actions, especially senior management. Any suggestions that increase costs, work or liability will likely fall on deaf ears. But to stay competitive and relevant, employers will look to offer what is best for them and their workforce — in that order — while complying with the law and avoiding lawsuits.
The workplace has evolved from the place where employees expect health-care and pension benefits, transitioning from defined-benefit to defined-contribution-like offerings, such as 401(k)s and high deductible health-care plans using health savings accounts, and now is morphing into overall financial planning and holistic benefits. Employers will look at benefits as one aspect of human capital risk management. More than the trillions of assets in DC plans fueling the almost $10 trillion in IRAs, 401(k) plans provide access to almost 100 million people — more if you include their families.
So how should plan advisers evolve their practices to leverage these trends and opportunities?
Multiple employer plans are an obvious solution not just for small plans but for all size plans. MEPs speak directly to the concerns that employers have about DC plans while providing scale and efficiencies to advisory practices.
Advisers should move their service focus from Triple F services (fees, funds and fiduciary), either by outsourcing to the MEP or a robo-fiduciary or by understanding they will have to charge less. Instead, they should focus on serving as an "outsourced chief retirement officer" to overworked, untrained and inexperienced retirement committees while offering to engage employees either through education, advice or financial wellness.
In addition, advisers should consider either offering wealth management services to capture downstream revenue as money moves out of the plan or integrating retirement with other benefits like health care — or both if they have the experience and wherewithal.
To combat decreasing fees, plan advisers have to either become better business managers overseeing people, technology and partners or outsource their back office to another entity.
Finally, advisers need to incorporate technology like artificial intelligence into their practices, which is a huge leap beyond today's simple robo-advisers that offer vanilla asset allocation models or financial planning.
When it comes to retirement and financial planning, people want to interact with people — but those advisers who incorporate leading-edge technology that offers customized tools, communicating with customers when and how they want, will outpace the competition.
In order for advisers to create new business models, they need to partner with the right record keepers, which have the resources to invest in technology, like cybersecurity, and are willing to share plan and participant data — a clear signal that they see advisers as partners, not necessary evils or, even worse, the competition.
Distribution partners such as aggregators, RIAs and broker-dealers should be acutely attuned to the needs of specialty plan advisers and offer them tools, integrated technology, and intellectual and back-office support, as well as efficient ways to acquire and service clients.
Advisers cannot be expected to do everything on their own, so it's important that they partner with the right providers and leverage the best technology while incorporating efficient processes and surrounding themselves with complementary associates.
Ready or not, the DC world in changing. Time to tune in or risk being left behind.
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University.