One of the few benefits of being around for a long time is perspective. Though the world is constantly changing, there are eras when significant changes occur, like after World War II, “The Sixties” and the Vietnam War, the advent of personal computing and the internet, the Great Recession and, most recently, COVID-19. As the world awakens from its first global pandemic in 100 years, which has acted as a catalyst for change, the fire that it caused is burning brighter than ever and will forever change the 401(k) or defined contribution industry.
Today, we have an election that seems bigger than which party or person wins. There is global unrest, with war raging in Europe and the Middle East as the Cold War heats up again with global powers lining up. Personal computing and the internet created social media, which may explode or implode because of AI. Finally, there are major demographic changes with 10,000 baby boomers retiring every day outnumbered by millennials while remote working and the gig economy threaten the traditional workplace.
The pandemic created severe job losses, which eventually turned into a war for talent, elevating the importance of retirement plans as a recruiting and retention tool.
So how do DC plans fit in and how will they be forced to change as a result?
What used to be a relatively sleepy and insulated industry is now sexy, with private equity money pouring into advisory firms, fintech and record keepers. Driving the demand is the hope to serve and monetize the 97% of DC participants without access to a personal advisor, as well as the explosion of new plans due to government mandates, tax incentives and PEPs.
Though some quip that convergence is a fad, those providers, lobbyists and advisors are threatened by what they know is about to happen. In a recent LinkedIn poll, 86% indicated that convergence of wealth, retirement and benefits at the workplace is not a fad—8% are unsure.
Fueled by technology, AI and ChatGPT, live advisors (maybe avatars?) will likely be able to better serve the masses at scale. A recent Schwab study reported that 61% of DC participants feel their financial situation warrants advice—61% are comfortable getting advice through AI and ChatGPT though a live person is preferred three to one.
In another LinkedIn poll, 48% of respondents thought AI/ChatGPT would have a major impact on bringing advice to the masses at scale, with another 37% believing it would have some impact. Just 11% thought it would have a limited impact with 4% unsure.
The shifting political and legal landscape is dramatically impacting DC plans: will participants get fiduciary protection within the plan and when they roll out; will the entire system be nationalized with a government match amplifying Social Security or at least a federal mandate rather than a patchwork of disparate state plans?
Litigation against DC plans is raging. It has gone beyond plan fees and funds and now attacks forfeiture accounts and pension risk transfers. The US Supreme Court’s overruling of the Chevron decision has shifted the power from agencies to the courts, which could result in more lawsuits.
And while the flight from DB to DC plans is officially over with $25.4 trillion in participant-directed accounts compared to a measly $3.3 trillion in pension plans, the journey is just starting for state and local government plans while ERISA 403(b) plans like universities and health care organizations have woken up to obvious abuses by inbred and limited providers which will hopefully migrate into K-12 plans where teachers are literally being ripped off kept afloat by powerful lobbyists.
The workplace is dramatically changing not just because of demographics but also because of remote workers and the gig economy. The current DC system must undergo another major rehaul, just as it did after the Pension Protection Act of 2006, which heralded in the auto plan and professionally managed investments.
This is just half the battle, as people expect to get 43% of their income in retirement from their DC plan, according to the recent Schwab study. Retirement income, an industry waiting to be born, struggles to achieve adoption. In my most recent LinkedIn poll, 50% of respondents thought that just 13% of plans would offer retirement income options in the next three years, even within TDFs and managed accounts, with almost 70% believing it would be available in less than 25% of plans.
And while investments and record keeping improved dramatically, resulting in steep price drops benefiting participants and improving outcomes because of the brave fiduciary RPAs espousing transparency and conducting documented due diligence starting almost 20 years ago, an even more important catalyst will be advisor due diligence and RFPs as that is the most important decision plan sponsors will make having an even greater impact on outcomes. Though most advisors resisted this movement just as record keepers did, the better providers prevailed and prospered at the expense of those who could not compete when their service and fees were exposed and would not change.
So as more money flows into the DC and fintech industries, as more wealth advisors serving clients with a plan while hoping to gather assets at the workplace begin to engage, and as more people want and expect to financial planning assistance before and after retirement, 401(k) plans, providers and advisory firms will get more attention and, as a result, evolve or die.
A very dangerous time for those resisting change invested in maintaining the status quo. As Mark Twain once quipped: “Denial is not just a river in Egypt.”
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.
