Awakening of 401(k) Plan Sponsors Creating Massive Change

Change happens slowly, even ploddingly, in the complicated 401(k) ecosystem because there are some many different groups each with varying self-interests and at different levels of development. But that is all about to change as small-to-mid-size plan sponsors are waking up not only to the realities of defined contribution plans, but also to their possibilities, while the small plan market is exploding and mega plans begin to shift their focus to participants.

There are three distinct groups that are essential parts of the 401(k) food chain, which in turn have three sub-groups:

1. Plan sponsors:
   1. The plan itself or participants and employees
   2. The organization sponsoring the plan—senior management
   3. The internal administrators usually from HR or finance
2. Vendors:
   1. Record keeper and third-party administrators
   2. Advisors/Consultants
      1. Specialists
      2. Intentionalists
      3. Accidentalists
   3. Asset managers
3. Government:
   1. DOL
   2. IRS
   3. SEC

Another three groups are more like observers and influencers but nevertheless important:

1. Academia
2. Lobbyists and associations
3. Media

Each group is at four stages of development with different parts at various levels:

1. Unconsciously incompetent
2. Consciously incompetent
3. Consciously competent
4. Unconsciously competent

And, of course, each group is primarily driven by self-interest, which is human nature even if some may also want to help others or at least not harm them.

The most interesting group that seems to be developing the fastest are the plan sponsors, especially the internal administrators and their senior managers. There are three subgroups which are also are different phases including:

1. Micro/start-up plans (<$1 million)
2. Small-to-mid-size to large ($1-500 million)
3. Mega plans  (+$500 million

The second group has come a long way from believing their plan is free and they can outsource all fiduciary liability to understanding the basics even if they are not experts. While still at the second phase of development (consciously incompetent), they have been motivated by the war for talent, which has energized senior managers. This group is starting to realize the power of workplace savings and how it can not just help employees save for retirement but also aid with other financial issues.

The plan advisor is the key, especially RPAs who led the fee disclosure and fiduciary movements and advocated for the ideal or auto-plan. But they are also at a crossroad as they turn their attention to working with and helping employees. Not only is that need attracting wealth advisors and institutional consultants, but it can also create conflicts of interest for advisors that sell proprietary products or ones that pay higher fees as well as conflicts with record keepers.

But the main driver can and should be the plan sponsor as they become consciously competent, incorporating workplace savings into their strategic mission of recruiting, retaining and enabling workers to be happier and more productive. A stark contrast to healthcare, which is primarily cost driven.

So while financial planning has become an overused and mostly misunderstood term, there are tangible ways that consciously competent plan sponsors can positively affect employees, including:

1. Younger workers:
   1. auto plan
   2. low cost TDFs
   3. student loan debt repayment
2. Older more mature workers:
   1. managed accounts
   2. HSAs (which all workers should use if available)
   3.  retirement income
3. All workers
   1. Financial planning
   2. Debt management
   3. Insurance and emergency savings

This awakening, especially among small-to-mid-size to large and even mega plans, will put pressure on their vendors to not just create new types of service enabled by technology and data but also expose those that have hidden agendas and conflicts of interest. All of which will fuel consolidation of RPAs and providers driven in part by plan level fee compression as well as attract new entrants like wealth advisors, fintech record keepers and AI serving new needs and more enlightened plan sponsors who demand more than fees, funds and fiduciary services.

Make no mistake— it is both a reckoning and awakening further winnowing the ranks of DC vendors and emboldening new entrants that have either been shut out or disinterested especially with ready, willing and able PE money.

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.