Employer and Participant Pressures Are Reshaping 401(k) Plans

Although providers and advisors often appear to be leading the conversation, plan sponsors ultimately determine what serves their interests and how those choices affect retirement plans. Those decisions are now helping drive change across the defined contribution industry for anyone willing to pay attention. After hundreds of half-day TPSU educational sessions with more than 16,000 plan sponsors in an open, interactive and safe setting, the concerns raised most often are not always the ones the industry focuses on.

The defined contribution market is a complex, interconnected ecosystem that is more complicated than wealth management because plan sponsors must be addressed before reaching the end user. Wealth, retirement and benefits are increasingly converging in the workplace, especially since most participants do not work with a financial advisor.

The broader DC ecosystem includes:

• 850,000 plans, with that number expected to exceed 1 million by 2029, according to Cerulli

• 285,000 active financial advisors

  • 50,000 hybrids focused on wealth but with significant DC assets or plans

40 national record keepers plus 200 regional firms

More than 2,000 compliance-only TPAs

55 distributors focused on DC

• 10 wirehouses, or firms with W-2 advisors

Other participants, including technology providers, data managers and tool vendors

Several major themes are influencing every segment of the market:

1. The convergence of wealth, retirement and benefits, all of which require access to and protection of participant data

2. A surge in small plans driven by government mandates

3. Consolidation across the DC industry

4. Technology, especially artificial intelligence

In the advisor-sold DC market, which generally covers plans ranging from about $3 million to $500 million in assets, plan sponsors are only beginning to understand the scale of their responsibilities as they move away from defined benefit plans and into 401(k) and 403(b) arrangements. Participants are largely left to figure out on their own how to make their savings last for life if they have accumulated enough assets.

Fee management alone is not enough, and it is fair to ask how many sponsors have actually read their 404(a)(5) disclosure forms.

These human resources, benefits and finance professionals are moving from unconscious incompetence to conscious incompetence on the way toward conscious competence, though few will ever reach unconscious competence. Most are handling numerous responsibilities with little training and limited internal support while also dealing with rising healthcare costs. They are overloaded and understaffed, and while AI will help, it will support people rather than replace them.

Even though recent research suggests that plans are increasingly focused on better outcomes, they still must first handle the basic mechanics of operating a plan, including:

• Working through compliance questions tied to SECURE 2.0

• Managing fiduciary liability under ERISA

• Understanding and controlling costs

• Conducting vendor due diligence and clarifying each partner’s role

• Performing investment due diligence, especially for professionally managed options such as target-date funds, managed accounts and retirement income solutions

• Engaging employees, especially younger workers who do not connect with the idea of “retirement”

• Creating and running a retirement committee

Pooled employer plans are starting to gain traction, although few people are asking about them or actively seeking them out. That does not make them unimportant or unlikely to grow. Even fewer sponsors are focused on retirement income, emergency savings, student loan assistance or private markets, largely because there are so many other pressing issues.

Most plans, particularly smaller ones, want simplicity and less administrative work. That explains why payroll providers have done well and why some fintech firms are succeeding. Others are relying on TPAs or may eventually move into a pooled employer plan. Some are turning to wealth advisors for help bringing in a new generation of advisors, especially as the number of new plans expands.

TPSU educational programs aim to shift attention toward outcomes, and that message is generally well received. Still, the operational burden and competing priorities make that difficult, especially when some retirement plan advisory firms continue to focus on fees, funds and fiduciaries.

Advisors are the only group willing to serve as co-fiduciaries, which makes them central to success. Even so, the largest advisory firms must work with record keepers, whose technology and capital are significant, as well as TPAs that understand compliance complexity and DCIOs that support their practices. As record keepers and TPAs continue to consolidate quickly, advisors need to choose their partners carefully.

These plans need help from people they trust. To earn that trust, service providers must speak plainly, avoid jargon and code references, and show they are willing to put the interests of the employer, the plan and participants ahead of their own. Good communication means understanding the listener and speaking their language, not simply speaking well.

Convergence is also creating competition between advisors and providers as both try to offset shrinking plan fees by reaching participants through IRA rollovers, managed accounts and outside assets. But just as all parties need to work together to help employers run their plans, they also need to cooperate in helping plans focus more on participants and stronger outcomes.