Welcome to this week’s edition of 401k Real Talk. This is Fred Barstein contributing editor at WealthManagement.com’s RPA omnichannel and CEO at TRAU, TPSU & 401kTV coming to you from sunny Jupiter FL- I review all of last week’s stories and select the most important and interesting ones providing open honest and candid discussion you will not get anyway else. So let’s get real!
While most DC professionals think that record keeping is a low margin business going through massive consolidation, no one has told PE firms which recently invested another $267m in debt and equity financing in Human Interest, a leading fintech record keeper. The new money at a stunning $1.33 bn valuation raises Human Interest’s total investment to $700m hoping at some point to go public.
What do PE firms see in what some call an unsustainable business? We all know that DC plan administration needs to be simplified which requires streamlined processing and state of the art technology, something traditional providers struggle with, especially as small plans explode. Human Interest is not alone with massive investments by PE firms in Guideline, Betterment and Vestwell.
Beyond plan level fees, the opportunity to cross sell other services to participants on their platforms has got to be the silver bullet PE firms are seeing which is also driving up the valuations of RPA firms as well as traditional record keepers. And while all bets made by PE firms do not pan out, directionally, they are rarely wrong.
Speaking of hot markets, many are predicting that AI will revolutionize the financial advice industry but advisors, driven by compliance concerns, do not agree.
According to a study with 595 firms by ACA, a compliance service provider, a whopping 64% have no plans to use client facing AI. Another 30% are exploring with just 2% currently using it.
So what is the future of AI in the financial services industry and for DC plans? Just as pure robo advisors failed to fulfill their promise, firms like Schwab and Vanguard leveraging people, brand and existing clients have become the largest “robos”. Though AI has vastly improved medical research, does anyone believe it will replace doctors?
As the DC industry struggles to provide advice to the masses at scale, AI could enable people at leading record keepers and advisory firms who have clients & capital to help more DC participants fueled by data and could be a key component to increase adoption of in-plan retirement income.
Another group of 401k haters have emerged this time from Wharton who propose a radically new system where contributions come from the government, not employers or employees, and only for workers 25-64 years old not claimed as a dependent and have less than $10,000 in investment income.
Though discrimination testing is designed to make sure the wealthy do not benefit unfairly, the results are that a significant percentage of assets are in their accounts.
Why are some many haters coming out of the woodwork proposing some form of a federal system + Social Security? Retirement in general and DC plans specifically are now sexy with over 10,000 baby boomers retiring every day and over $11 trillion in DC assets + $14.3 trillion in IRAs fueled by rollovers. And while intentions and efforts by the DC industry may be good, ultimately we will be judged on results which the haters claim are lacking.
The top 10 stories affecting 401(k) and 403(b) plans so far in 2024 have been dominated by laws, lawsuits and advisor M&A. No longer in a silo, the economy and societal pressures are causing the defined contribution industry to evolve, somewhat begrudgingly, as retirement in general and DC plans specifically have become sexy.
Themes running through the top stories are:
- The explosion of DC plans,
- The convergence of wealth, retirement and benefits at the workplace
- Retirement income
Read my recent column about the top 10 stories so far in 2024 providing interesting insights into the state of DC plans.
So those were the most important stories from the past week. I listed a few others I thought were worth reading covering:
- How the Supreme Court’s decision overturning Chevron could lead to more lawsuits
- Managed account platforms are consolidating
- The major impediments to in-plan annuities
- Osaic beefs up retirement income platform
- How PE money is trumping internal succession planning
Please let me know if I missed anything or if you would like to comment. Otherwise I look forward to speaking to you next week on 401k Real Talk.