Digital record keepers are changing the micro 401(k) market

Many of these newer entrants are pure-play record keepers without an investment management arm. They employ lean, digitally focused operating models and distribute their services directlly to plan sponsors.

The retirement coverage gap among small businesses, along with the perception that the micro 401(k) market (plans with less than $5 million in assets) is underserved, have attracted several new tech-forward record keepers, such as Guideline, Human Interest and Vestwell, to this market.

Traditional micro 401(k) providers typically bundle record keeping with proprietary investments, which tend to be the more lucrative component of their micro market offerings. But many of these newer tech-focused entrants are pure-play record keepers without an investment management arm.

In contrast to the wholesaler-driven distribution models of their traditional provider counterparts, these newer entrants employ lean, digitally focused operating models, distributing their services directly to plan sponsors through easy-to-onboard enrollment portals for small business owners. That’s helped some of them carve out a niche in the startup plan space. Further, some of the newer entrants will offer to take on 3(38) or 3(21) fiduciary responsibilities, which are typically assumed by the adviser or a third-party fiduciary services provider.

To retain startup plans over the long term, providers need to demonstrate that they can grow alongside their plan sponsor clients as their retirement needs become more complex.

When a 401(k) plan surpasses 100 participants, administrators are required to submit a long Form 5500 —subject to the Department of Labor’s “80-120” rule — and the plan becomes subject to annual DOL audits, which can be burdensome for plan administrators.

Further, as plans mature, plan sponsors may look to enhance their retirement plan offering by customizing their plan design, implementing a financial wellness program or enhancing their investment lineup.

In many cases, plan sponsors will turn to an adviser to help them navigate these plan-related initiatives and administrative burdens. While cost is always top of mind for plan sponsors and their adviser partners, advisers tend to favor record keepers that deliver a smooth, supportive administrative experience.

“I take over cases where the record keeper was helping the plan sponsor fill out the 5500, but they’d screw up left and right, so I’d bring on one of my preferred record keepers.” said one retirement plan adviser. “Everyone is so cheap these days, I basically just go with the record keeper that’s going to give me and my plan sponsors the best service.” To that point, retirement specialist advisers indicate that poor service (39%) is the most common reason for conducting a record-keeper request for proposal.

While some of these newer tech-forward providers may seek to bypass the plan adviser, Cerulli research finds broker-dealer-based advisers are commonly perceived as the key decision-makers when it comes to plan design and investment lineups in the micro market and typically have a short list of preferred record keepers they like to employ.

For some of these newer, pure-play record keepers, the direct-to-plan-sponsor approach to platform distribution has proven successful, but record keepers without a strong adviser network will likely experience difficulties winning business via requests for proposal in such an adviser-driven space.

[More: Is massive consolidation in the 401(k) record-keeping industry inevitable?]

Shawn O’Brien is senior analyst for retirement at Cerulli Associates.