The convergence of wealth, retirement and benefits at the workplace is exposing both the power and weaknesses of the defined contribution system. At its core, convergence has the potential to pit advisors and record keepers who partnered against each other as both parties seek to serve and ultimately monetize participants.
The forces driving convergence at the workplace are based on societal pressures that the DC system cannot control or mitigate. The move from defined benefit to DC plans shifted liability but also power to individuals. And though most average people are not engaged nor able to afford personalized financial advice, the power of AI will likely change that.
Along with the need to go beyond increasing participation and contributions or putting them into target date funds and hoping for the best, record keepers, advisors and asset managers need to seek new forms of revenue as the old ways have been commoditized, resulting in dramatic fee reductions.
The announced recent sale of OneAmerica’s retirement division to Voya is a cautionary tale and perhaps a seminal moment. Until now, valuations of 401(k) record keepers and retirement plan advisors have skyrocketed, as opposed to active fund managers, with buyers and investors banking on a firm’s ability to convert participants. Typically, record keepers have been valued at $500 to $600 per participant, which, while high, was crushed by the reported $1,000 paid by Empower for MassMutual’s retirement business. Fintech record keepers with little to no profit have raised over $1 billion. If accurate, One OneAmerica, with 1.1 million participants for an upfront price of $50 million with a potential backend of $160 million, is valued at $50 to $200 per participant.
Could this be the moment when private equity firms, venture capitalists and potential buyers start having a more realistic view of who can execute on the potential of the convergence rather than who is able to do so? Won’t happen? Remember when the value of active asset managers plummeted?
All of which pits advisors who sell plans against the record keepers who service them. At one of the 2019 RPA Record Keeper Roundtables, the head of a major provider asked why advisors were being paid more than his firm, which fielded 40 million participant calls, forgetting who sold the plan in the first place. How much would it cost to replace that sales force?
And while some take an optimistic view about how advisors and record keepers can and should collaborate, realistically there is one winner for each participant. Those record keepers, like OneAmerica, that do not vie for participants, perhaps because they cannot, will have a hard time competing with the likes of Fidelity, Schwab, Vanguard and Principal.
At the recent RPA Broker/Dealer Roundtable, the group went postal on one record keeper who espouses their support of advisors while overtly competing for participants unwilling to even sign selling agreements that set limits on who they can call.
This is the present reality for partners that are now being forced to compete because of the need to generate more revenue and justify their valuations, the demand by plan sponsors to help more of their employees and the obvious need and opportunity the help average people.
401(k) plans are an illusion—they conveniently and cost-effectively aggregate individuals to tax efficiently save for retirement. Most of the DC industry is finally realizing and trying to capitalize on participant services just as the Arab world did when they became aware of the resources underground of what seemed like a barren land.
Plan level services are like the Arabian deserts difficult to survive on—participants are the underground and untapped resources. Who can mine them and who owns or has the right to do so?
While data is key, it is like crude oil. It must be refined, stored and distributed safely without oil spills. In other words, how to leverage the resource to scale advice to the masses? Obviously, record keepers and possibly RPAs are well positioned, but so are wealth managers who have more experience with and access to technology, acting as refiners.
Those who can leverage AI will win, not by replacing people, as robo advisors promised and failed to do, but to augment and supplement advisors, as well as prospect and engage.
Within this framework, we asked several providers and advisory firms what they were doing to partner. It’s a tricky and sensitive subject that few wanted to go on the record to discuss. Some of the better responses included:
- Kameron Jones, SVP at NFP Retirement (an Aon Company) wants their record keeper partners to be flexible and collaborative, willing to share data realizing that neither party can do everything for all participants.
- Joe DeNoyior, president of Hub Retirement and Private Wealth, wants help with branding especially through advisor managed accounts delivering education as if from Hub while generating leads.
- Jack Barry, head of product at John Hancock Retirement, said his firm is willing to share data with plan sponsor permission as well as branding through advisor managed accounts.
- Brad Arends, CEO of Intellicents, wants record keepers to reference their services on their website with directions on how to get there, providing data about terminated employees while turning off their own efforts if the client agrees.
- T Rowe Price is offering advisor branding, data, co-developed products and integration of advisor solutions.
While some record keepers were cited as either unfriendly or friendly, it might not be fair to cite them with such a small sample size which could depend on the size and solutions of the advisory firm. That said, the “usual suspects” would not even comment.
The new goal of DC plans is to reach and engage with more people at the workplace to improve not just retirement income but ultimately financial situations through a plan that includes advice on debt, credit, savings and investing.
Beyond investment performance, participation and contribution rates and maximizing the match, the DC industry, particularly record keepers and advisors, will be judged and valued on holistic outcomes with the client experience not compared to each other but to what the consumer gets outside their DC plan and wealth management services.
Who wins will depend on their ability to mine, refine and deliver advice at scale collaborating with willing providers by creating brand and ultimately a relationship built on trust over time with employees leveraging data, technology and AI tempered with empathy.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.
