The defined contribution industry is abuzz with the potential for advisors and providers to leverage the convergence of wealth, retirement and benefits at the workplace. And while there are a few skeptics, there are also few advisors and providers able to fully participate.
So is convergence a fad, which only a select group will benefit from, and not really take off like we have seen with retirement income, or will it define the winners and losers in the DC world?
The Case Against
The reality is that few providers have a consumer brand or capability, while most participants do not even know who their record keeper is. It’s even harder for advisors who do not have the benefit of a website and statement branding and have much less access to participant data. Additionally, most do not have the capital to invest in branding, technology or build call centers.
It's why just 10% of rollovers go to a new advisor while advisors with existing relationships get 54%, according to Cerulli, in 2023, up from 2021, and rollover account balances average $200,000 compared to just $144,000 for new advisors. Why? Participants with existing advisor relations have more assets.
This is why most wealth advisors avoid 401(k) plans—the fees are low and only getting lower, while the liability under ERISA is high and only getting higher. Most wealth advisors only want to work with high-net-worth clients who are scarce and hard to find within DC plans.
The promise of financial wellness for many is still a pipe dream, as is providing advice at scale with major impediments like:
- Lack of high-quality data and issues around privacy
- Archaic record keeper tech
- Advisors not adopting AI with concerns about compliance
Few RPAs who have access to tens of thousands if not millions of participants have viable wealth stacks or capabilities, most are still stuck in the Triple F world focused on scaling plan level service. The convergence conversation is uncomfortable and generally met with denial and skepticism.
Convergence of benefits at the workplace is even more difficult, which has been mostly at the plan level as quite a few benefits and P&C firms have been building or buying up retirement advisors hoping to cross-sell.
The Case For
Glaring is the immense opportunity of over 110 million DC accounts with an estimated 80 million participants and $11.3 trillion, of which only 3% have a relationship with a financial advisor. Over 50% of wealth is hidden in the workplace, the best place to find it, which, according to Morgan Stanley’s James Gorman, will be his firm’s greatest source of new assets over the next decade.
According to a 2023 Fidelity Investments survey, one of plan sponsors’ top priorities is getting financial help and advice for employees, not just the high net worth. Even though the war for talent is subsiding after a historic frenzy, DC plans have become a key weapon to retain and recruit.
The recently released Schwab study with 1,000 401(k) participants indicates that 61% want and need advice, up from 55% in 2023, with many expecting it from their DC plan provider or advisor—61% are comfortable getting advice from AI or ChatGPT though more (60%) would follow a human compared to just 19% for robos.
So, along with the immense opportunity and demand from clients, advisors and providers can leverage relationships with participants in the plans they manage as plan-level fees decline and services have been commoditized. Opportunities with participants are why PE firms keep investing in and driving up valuations of record keepers and advisory firms.
Still not convinced? The top RPA firms are maniacally focused on the bridge to wealth, led by Captrust, which has been leaning in for almost a decade, buying up more RIAs than RPAs while other RPA aggregators are scrambling to catch up. Meanwhile, leading RIA aggregators like Creative Planning and Mariner are acquiring retirement practices and institutional investment consultants are trying to engage smaller plans through PEPs and participants through digital advice.
Let’s not forget demographics with 10,000 baby boomers retiring every day, HENRYs (high earners not rich yet) where advisors get to form relationships before there is an event and skepticism about the viability of Social Security. The drumbeat for in-plan retirement income continues, with participants in the Schwab study indicating that they expect their 401(k) plan will provide 43% of their income in retirement.
And while most wealth managers do not intend to focus on DC plans, according to Cerulli, over 60,000 advisors get between 15% and 49% of their revenue from them. Do not forget the expected explosion of DC plans due to state mandates and tax incentives facilitated by PEPs resulting in wealth advisors who have business owners or managers as clients required to help or allow another advisor into the mix.
Benefit and P&C firms are also leaning in, hoping to cross-sell their services, which are much more profitable than DC plans, to the organizations that their RPA firms work with, which tend to be larger.
So is the convergence of wealth, retirement and benefits at the workplace real? And will providers and advisors, along with their industry associations, unwilling or unable to participate, be able to keep the focus on plan-level services and the discussion within the 401(k) echo chamber? I am not a betting person, but if I were, I am pretty sure which way I would go. What about you?
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.