Convergence of benefits, wealth and retirement planning is coming

The entire defined-contribution industry continues to both consolidate and converge. Consolidation refers to mergers and acquisitions, while convergence refers to the mixing of services offered. Both drive each other.

DC providers, especially record keepers and retirement plan advisers, are consolidating rapidly as their respective industries mature. The same is true for third-party administrators and defined-contribution investment-only firms, or DCIOs.

But the convergence of wealth, benefits and retirement is more exciting and offers more opportunities, especially for RPAs.

It’s important to understand why employers offered retirement plans in the first place and why they shifted from defined-benefit to DC plans.

A little history

To retain workers and make them more productive and loyal, pension plans proliferated among larger companies after World War II, at one point covering almost half of all workers. There was also a herd mentality – if competitors were doing it, then not offering DB plans looked bad.

DB plans grew out of favor because liabilities grew – people started living longer, and workers changed jobs more often. During the 1990s, which were the advent of 401(k) and 403(b) plans, the raging bull market made it feel like DC plans were actually better than DB plans. With a 401(k), workers could change jobs and keep their benefit, rather than staying at the same company for 25-plus years. And, the investments were more exciting.

However, the 2001 and ensuing market crashes exposed issues with DC plans. Investors chased returns using popular, high priced mutual funds without rebalancing or allocating assets. When the tide turned, we all realized that most participants were swimming naked.

Then came a movement for participant advice, which has been provided either by advisers, record keepers or firms like Financial Engines. This has since morphed into the broader concept of financial wellness.

But tech-only wellness, just like managed accounts, doesn’t get participants engaged. Advisers and providers lack robust technology. Both lack smart data. Most RPAs had been reluctant to cross sell rollovers and financial planning either because of conflicts or because they simply didn’t know how.

New money

As prices and margins decline for RPAs and record keepers, both are looking for new sources of revenue, now squarely focused on participants. The DC platform, endorsed and overseen by an ERISA fiduciary, is more trustworthy than most consumer brands, as well as banks that got a black eye during the 2008 recession driven by the real estate collapse.

Access to buyers at the workplace, with data through the DC plan, payroll and healthcare plans, has great potential.

Big consulting firms like McKinsey and Bain & Company have been selling convergence to record keepers for years.

Convergence is driving the incredible growth and popularity of DC aggregators, especially benefits firms like Hub, NFP and OneDigital, because it takes scale, capital and technology to realize opportunities. Even CapTrust, the largest DC aggregator, sold a piece of its company to get capital to buy more wealth-management firms.

And wealth managers that only dabble in the DC market see opportunities to cross sell participants in their plan. Broker dealers believe they have better training and services to use the convergence of wealth, retirement and benefits than specialists and aggregators, which may be true.

For advisers and record keepers, the inhibitors are technology, data and execution.

No major DC provider or advisory firm knows how to efficiently sell to the less-affluent DC plan participants who cannot afford traditional financial planning. And those participants represent 90% of the 401(k) population. Tech-based services have failed to significantly change behavior or improve results. And no one within the DC ecosystem is using data as effectively as online consumer brands – not even close!

That’s not really bad news. It’s a big opportunity.

Whoever wins the convergence game not only stands to reap big dividends. They are also in a position to really help the people who need it most. But only those with a world class technology stack, access to participant and plan data, capital, expertise and will to execute have a chance.

If the private sector does not address retirement plan coverage, the government will step in. And good luck competing with them, especially if they remove the tax benefits.

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’​ RPA Convergence newsletter.