401(k) plans are an illusion

401(k) plans are an illusion
The participants are what matter, not the plan
NOV 21, 2019
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 retirementby 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. [Recommended video: Carrie Schwab-Pomerantz: Power of creating financial accessibility] ​ 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.

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.