As the tech world moves at lightning speed to leverage consumer data to provide efficiencies and better client experiences, the defined-contribution world is taking a Luddite stance, with no apparent solution in sight.
What are the impediments? What damage is being done? And how does the data dilemma make the $7.7 trillion DC market vulnerable to data-savvy tech companies like Amazon?
The need for better participant data is obvious, not only to customize investments beyond age-based target-date strategies to create a customized DB-like liability-driven investment, but also to make proper benefit allocations. Yet very little has been done to customize benefits and investments for participants.
Record keepers have some participant data but are limited by omnibus systems that make it possible to administer very small accounts with miniscule contributions, but difficult to drill down to individual data. Record keepers also have slim margins, which makes systemwide upgrades difficult, while cybersecurity concerns make sharing participant data even more problematic.
Yet broker-dealers, RIAs and individual advisers are asking for the data, each in a different file format, which is expensive for record keepers. They have spent tens of millions to accommodate changes requested by broker-dealers as a result of the now-defunct DOL fiduciary rule, which has stymied other investments.
(More: Opaque, outdated 401(k) plan disclosures harming investors, advisers)
One potential solution is the Depository Trust & Clearing Corp., an industry-owned entity that also runs the National Securities Clearing Corp., which revolutionized mutual fund trading. DTCC is working with the Society of Professional Asset-Managers and Record Keepers and with DC broker-dealers to create a common file format leveraging DTCC's
Retirement Plan Reporting system. But progress is slow. Private solutions include Envestnet Retirement Solutions, Morningstar and RPAG.
So what is impeding progress?
Thin margins have forced record keepers to look for additional revenue. Along with potentially charging for the data, record keepers like Fidelity and Empower are looking to leverage the data to create custom investments like dynamic managed accounts. They also see opportunities to sell participants other services, such as rollovers and even insurance products. Providing data to partners may limit these opportunities.
(More: Are record keepers friend or foe to 401(k) advisers?)
The situation highlights the issues facing open systems when the party that houses the data did not create the relationship. Who owns that relationship going forward to cross-sell other products? The answer depends on whom you ask.
Closed systems, like Fidelity in the 1990s and Betterment today, are able to be consumer-centric, not relying on or beholden to third parties. But open systems dominate the 401(k) industry.
Envestnet may be best-positioned to leverage the data because of its parent company's wealth management system, as well as the data aggregation resources of its sister company, Yodlee. But record keepers and advisers are reluctant to turn over data to a private entity only to have to buy it back.
Participants at the
InvestmentNews Aggregator Roundtable and Think Tank voiced concerns about creating another Morningstar, where they have to pay significant amounts to buy back their own data.
Incumbent record keepers and advisers are vulnerable to tech-savvy companies that are consumer-focused, like Amazon, which would gladly work with the margins that most record keepers make. Others like Acorn are able to profitably invest and manage micro amounts for individual investors.
Sales to plan sponsors remain a stumbling block, but what if these companies can break advisers' stranglehold on plan sponsors by going direct to participants? Even the father of the 401(k) plan, Ted Benna, advocates for a simpler brokerage account for smaller employees rather than current omnibus ERISA qualified plans. State auto-IRAs are following that model.
So what will cause the industry to change and share data to benefit participants and create efficiencies? Industry cooperation would be best but more likely change will happen only if there are threats to the current business model from companies like Amazon or government mandates.
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University.
