Until relatively recently, the defined contribution industry had been a niche market that most wealth advisors and asset managers ignored. There were, and still are, many barriers to entry, including low fees, high liability, limited tech and complicated rules and distribution systems. Those barriers that had kept 401(k) and 403(b) plans isolated, protected from more sophisticated providers and advisors, are being overcome as the opportunities are now too great to ignore, with wealth and retirement converging at the workplace.
Unlike the wealth management ecosystem, the DC plan ecosystem involves more entities, which must come together to offer a plan sponsor and their participants a seamless, integrated solution while figuring out how to split costs and fees.
The ecosystem includes:
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The 100 million active DC participants plus their beneficiaries and families, which makes the number much higher, and even more if non-active accounts are included
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DC plans at 830,000 expected to balloon to over 1 million by 2030, driven by government mandates
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Almost 300,000 active advisors, which include just over 10,000 RPA specialists and over 60,000 wealth advisors who have a significant retirement plan practice
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Record keepers—40 are national, with another 200-plus regional
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Compliance only TPAs that rule the small plan market and number over 2.500
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Over 50 DCIOs, which focus on RPAs, increasing due to guaranteed income providers and private asset managers
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Others which include
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Trustees and custodians
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Managed account providers
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IRA enablers
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Data managers and transfer agents
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Financial wellness and engagement firms
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Tech and AI providers
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Third party asset managers like Pontera
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It’s quite a group, complicated by the fact that the buyer is not the user, with both plan sponsors and participants relatively uneducated and unengaged.
Major themes driving the DC industry include:
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Convergence of wealth and retirement at the workplace
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Explosion of plan formation
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New tech and AI-focused
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Industry-wide consolidation
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New laws, regulations and litigation
Any of these themes could drive major revisions, but combined, they promise to completely change workplace savings and benefit plans—the difference between an evolution and a revolution.
The change must start with record-keeping systems, which have been a limiting factor that cannot accommodate the growing tech and AI solutions, as well as their clients’ need to offer wealth services to the participants in the plans they serve, and the ability to enable advisors who brought them the plans. Not only must the platform help clients manage and distribute data, but they also need to be flexible enough to integrate new tech and AI solutions they do not build themselves.
FIS’s new cloud-based Omni and Relius systems should help, as well as the burgeoning tech stack, which, while much smaller than in the wealth sectors, is growing rapidly.
Many providers and firms are still stuck in silos, which inhibits their ability to fully leverage the new opportunities. Departments within many larger firms do not communicate and cooperate with each other, while smaller firms struggle to understand all aspects of their clients’ business.
Convergence is the driving force bringing in wealth advisors, their broker/dealers and the asset managers that serve them. Private equity is fueling the growth of wealth by RPA aggregators, with some pushing RIAs to leverage DC plans to grow. Either way, even the largest firms like Captrust, Fisher Investments and Creative Planning have taken in outside capital to grow and fully leverage the opportunities.
Those who can both close and service DC plans, access and manage participant data, and leverage technology and AI to serve the 95% of participants who do not have a personal financial advisor will succeed. But they still need to be able to hire and train financial coaches to meet with participants, uncovering opportunities while grooming the next generation of advisors.
Though the DC ecosystem is complicated, fraught with land mines that seem barren because of low plan fees, both the wealth and DC industries are realizing the opportunity to attract new wealth clients at a faster clip than traditional marketing. RPAs and record keepers that own most of the land have a head start, but wealth advisors and broker/dealers know how to farm it. The tech boom is enabling both advisors and providers to provide advice at scale, but very few have figured out how to engage participants.
The revolution is coming—it will not be televised.
