401(k) plans are an illusion

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The participants are what matter, not the plan

The 1980s, when 401(k) plans were first launched, was the age of record keepers partnering with insurance companies and banks offering guaranteed income contracts. Those providers were overtaken in the early 1990s by mutual fund companies like Fidelity Investments as the market boomed and smaller companies formed 401(k) plans financed by revenue sharing.

That in turn led to the rise of financial advisers focused on investments in the 2000s, which then led to the focus on plan sponsors enabled by the 2006 Pension Protection Act to redesign plans with better outcomes using automatic enrollment and target-date funds.

Today we are on the precipice of a new era focused squarely on the participant. The participant is all that is real about a 401(k) plan. Plans do not exist other than as a mental and legal shortcut to describe the group of participants working for a company who have joined together and can change from day to day as they enter or leave the plan for various reasons.

The only concrete aspects of 401(k) plans are the participants and the money in their accounts.

Serving plans, or record keepers, or even advisers is nothing other than a way to efficiently access participants. Why else do record keepers still command high valuations from private-equity firms even though their margins are low, while active money managers are not highly valued even though margins are still high?

The same goes for plan advisers that are selling at record prices. Both advisers and record keepers have efficient access to participants fueled by the trust enabled by employers. While payroll companies have data, they do not have relationships with participants nor do they have their trust.

Wonder why fintech firms are gravitating to the 401(k) market? Efficient and trusted access to participants.

The convergence of wealth, employee benefits and retirement is the result of workers being forced to take charge of their retirement by leveraging a worksite platform run by record keepers. This platform is starting to be used to help employees make other decisions around saving, investing, debt management and health care.

But unleashing this potential will not be easy. The ideal or so-called “auto plan” may lead to much higher account balances but it does not lead to engagement — quite the opposite.

So how do we engage participants? Technology alone has proven to be ineffective. Plan advisers need to leverage technology to profitably interact with people who cannot afford the going rate for wealth management or even financial planning. The same goes for wealth managers who may have a few plans they acquired to accommodate and protect a client. They have not figured out how to service less affluent investors.

But even being an adviser integrated with the right technology is not enough. Advisers need data — smart data that is accurate and clean, starting with what’s on the record keepers’ platforms and coupled with other personal financial information. That trinity of advisers, technology and smart data will unlock the true value of 401(k) plans.

That is exponentially greater than the current value of 401(k) plans, where fees are diminishing while service requirements and expectations are rising.

Stuck in the illusion, advisers will get lost and discouraged. Seeing reality, digital advisers with access to data can unleash 401(k) plans’ true potential.

[More: Is the 401(k) adviser M&A market about to cool down?]

Fred Barstein is 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.