Plan Sponsors Hold the Key To Fixing DC Industry
Though they seem to be led by providers and advisors, plan sponsors ultimately decide what is good for them and how that affects their retirement plans, which in turn will drive change for those in the defined contribution industry willing to listen. After 700 half-day TPSU educational programs with over 16,000 plan sponsors in an open, interactive and safe forum, the issues that come up most often are not always where the industry focuses.
The DC industry is an intricate and interrelated ecosystem, more complicated than wealth, because you must deal with plan sponsors before you get to the end user. Wealth, retirement and eventually benefits are converging at the workplace because 95% of the participants do not have a financial advisor.
The complicated DC ecosystem includes:
-
850,000 plans growing to over 1 million by 2029, according to Cerulli
-
285,000 active financial advisors
-
50,000 hybrids—focused on wealth but significant DC assets or plans
-
-
40 national record keepers plus 200 regionals
-
2,000+ compliance only TPAs
-
55 distributors focused on DC
-
10 wirehouses or those with W-2 advisors
-
-
Other
-
Tech, data managers and tool provider
-
The major industry themes that are affecting all segments of the market are:
-
Convergence of wealth, retirement and benefits all the requiring access to and protection of participant data
-
Explosion of small plans driven by government mandates
-
DC industry consolidation
-
Tech especially artificial intelligence
In the advisor-sold DC market, which includes plans roughly from $3 million to $500 million in assets, plan sponsors are just starting to wake up to their awesome responsibilities and overwhelming challenges as they shift from defined benefit plans, which now have less that $4 trillion, to 401(k) and 403(b) plans. Participants are on their own to decide:
-
How to make it last for the rest of their lives if they are fortunate enough to have accumulated enough assets
Forget about managing fees—how many do you think have read their 404(a)(5) disclosure forms?
These human resources, benefits and financial professionals are moving from being unconsciously incompetent to consciously incompetent on the road to consciously competent—few will become unconsciously competent. Most juggle 10 jobs with little to no training and few internal resources dealing with double digit increase in healthcare. They are overwhelmed and understaffed and though AI will help, it enables not replace people.
While recent research suggests that plans are focused on improving outcomes, they must first deal with the nuts and bolts of running their plan, which includes:
-
Compliance still trying to figure out SECURE 2.0
-
Managing their fiduciary liability under ERISA
-
Understanding and controlling costs
-
Vendor due diligence—what are the roles of each partner
-
Investment due diligence, especially professionally managed investments like target date funds, managed accounts and retirement income
-
Engaging employees, especially younger ones who cannot relate to the word “retirement”
-
Forming and running a retirement committee
Pooled employer plans are beginning to get traction, but few are aware of or asking for them, which does not mean they are not important or will not grow—even fewer are focused on retirement income, emergency savings plans, student loans or private markets. There are just too many other priorities.
Most plans, especially smaller ones, want simplicity and less work, which is why payrolls have thrived and why a few fintechs are succeeding—others are either leveraging TPAs or will move to a PEP. Some are asking their wealth advisor for help bringing in a new crop of advisors, especially with the explosion of new plans.
TPSU educational programs try to bring the focus on outcomes which is generally well received but these operational issues and other priorities make it difficult, not helped by the Triple F RPAs who still focus on fees, funds and fiduciaries.
Because advisors are the only group willing to act as co-fiduciaries, they are the key to success but even the largest advisory firms need to collaborate with the record keeper, which has massive technology capabilities and capital, TPAs who understand the complexity of compliance, and DCIOs that support their practices. Advisors must choose their partners carefully as both record keepers and TPAs are consolidating rapidly.
These plans need help from someone they can trust. To gain that, they need to speak in plain language avoiding use of acronyms and code sections showing that they are willing to put the employer and their plan and participants’ interest ahead of their own. Communication is about understanding the listener and speaking in their language, willing to engage not being eloquent.
Convergence is pitting advisors and providers against each other as both race to augment dwindling plan fees by leveraging participants either through IRA rollovers, managed accounts and outside assets. Just as it is essential for all parties to come together to help employers run their plan, they need to collaborate to help plans shift their focus to participants and improved outcomes.
