At the recent RPA Record Keeper Roundtable, the focus was on how to handle the explosion of new 401(k) plans, especially smaller ones, enticing and welcoming wealth managers as well as the cost and opportunities with technology. With fees stable or going down and the cost of technology and labor rising while the demand for service increases, what can providers do to compete and maintain healthy margins.
There was little discussion about consolidation, though no one disputed it will continue, and no discussion about big tech firms like Amazon or Facebook swooping in to take over though the group acknowledged that clients compare the service and tech they get from consumer companies, not 401(k) providers. And the growing number of fintech record keepers fueled by private equity are not looking to disrupt—they seek partnership and collaboration with the current providers, payroll companies and benefit firms.
The current high-touch systems built on antiquated technology and processes may not work with smaller plans and start-ups and may eventually be replaced by many larger ones. As record keepers and advisors seek additional revenue from participants, the need for data and collaboration increases.
The current ERISA 401(k) and 403(b) system is the most complicated financial service sector because multiple, unrelated parties must come together to provide a seamless service often deploying revenue sharing schemes, some transparent and some hidden, in a highly regulated and litigious environment.
The future, whether brilliant or terrifying, depends on whether firms can develop deeper collaboration, including a willingness to partner rather than build, new technology and processes, and a way to safely leverage participant data while enabling people.
Record Keepers
Record keepers are the foundation as the platforms from which all services are delivered requiring heavy capital investment and large labor forces akin to airlines. They need people—internal and external—in the form of wholesalers, advisors and TPAs. No doubt the drive for more efficiencies will adversely affect some, but their need will not go away as technology cannot replace relationships, institutional knowledge and hand holding, though it will augment and enable them.
Though one major record keeper is rumored to have set aside $500 million to build a new, proprietary record keeping system, most others will increase partnerships with fintech and wealth tech firms. Few record keepers like Fidelity, and the rumored provider working on a new system, will build rather than partner because they believe it is an advantage others cannot replicate. While it’s more efficient for one provider to act as a record keeper, asset manager and distributor, those days are long gone.
Technology Firms
Fintech record keepers have the luxury of building new systems on cutting-edge technology, deploying more efficient processes, and safely delivering data incorporating outside technology.
Fintech and wealth tech providers will be the key to serving smaller plans and less wealthy participants. Payroll providers like Paychex are unique—by necessity, they have built streamlined processes to keep costs low. They not only have the luxury of payroll integration, providing access to both plan and payroll data, but they also have relationships with hundreds of thousands of organizations with massive sales forces.
People
This brings us to people who are hard, if not impossible, to replace while the most costly and difficult to manage, each with their own challenges.
Wholesalers are the face of record keepers acting as ambassadors, many with deep relationships and institutional knowledge. Though providers often look to cut compensation and headcount, wholesalers will never be entirely replaced as long as providers rely on advisors for distribution. DCIOs need to leverage their hordes of retail wholesalers to reach beyond the RPA specialists they currently focus on.
Each segment of advisors and their home offices offers different opportunities and challenges. RPA specialists interested in serving smaller plans will need help through group plans, streamlined processing and outsourced services as well as access to data and technology to serve participants. Wealth managers and their home offices need partners to do the heavy lifting of administering and servicing the plans, taking on fiduciary liability so advisors can focus on relationships with business owner and attractive participants like HENRYs.
Payroll providers without proprietary record keeping are crucial partners leveraged by many fintechs like Guideline to grow along with benefit and P&C brokers. Many plans will be sold direct since many smaller business owners do not have an advisor.
The role of TPAs will only increase to serve smaller plans sold by both RPAs and wealth managers, allowing record keepers to outsource much of the high touch service model, keeping costs down though they must integrate them into their systems while providing access to expensive technology. Though plans may pay more, it’s a choice if they want high touch service just like those that want customization.
Can the defined contribution industry come together to collaborate, leveraging fintechs and emerging technology like AI while safely accessing data and enabling people, both internally and externally, to incorporate more streamlined processes? It is an existential question for many, which will drive further consolidation, creating more scale for the winners as some look to the future fearfully while others only see opportunities.
Because if the industry does not lean in and adopt change, at some point big tech firms like Amazon, Google, Apple and Facebook, likely frustrated with the level of service and technology they get from their current providers, will create their own systems for employees, which they could offer to existing clients and users at lower costs, like payroll providers do today, seamlessly integrating independent and local service providers as retirement planning becomes mainstream.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.
