Regulatory pressure and new technology for reaching clients will make the 401(k) business more viable in terms of advisers’ ability to serve participants, contends William Trout, a senior analyst for Celent in Houston.
In his article, “The Defined Contribution Conundrum: Automated Approaches to Unlocking the Potential of the 401(k) Retail Investments Market,” Trout says plan participants have been poorly served by the closed 401(k) ecosystem, and it has also discouraged advisers—many have treated the 401(k) as a feeder system for their more profitable individual retirement account (IRA) side lines. He contends that automated delivery (including a direct-to-consumer form that skirts connectivity requirements to plan sponsors and providers) affords opportunities to scale what has been a low-margin business.
“The DC space is less transparent, a shoddier user experience than general retail brokerage because retail brokerage has had transparency forced upon it,” Trout tells PLANADVISER. “Participants are still paying the kind of fees that have gone away in the retail space.” He adds that this is one of the things the Department of Labor (DOL) is trying to change with its proposed conflicts of interest rule.
If a fiduciary standard implies fee transparency, there will be a pushback from investors, according to Trout. He notes in his article that this scenario has already played out in the UK. There will be an advice gap where the government might undercut its own objectives of ensuring that more participants receive comprehensive advice on their investments, and automated, robo-adviser solutions may be able to fill that gap.
However, there are barriers to entering the 401(k) market. Managed account providers acting as de-facto robo-advisers to DC plans need a connection with retirement plan providers—such is the case with Financial Engines and Morningstar—and an agreement with the plan sponsor that they can provide advice. Trout says these models may be a bellwether for the retail investments business as a whole. He notes that already it is becoming more difficult for advisers to encourage retirement plan participants to roll their balances into an IRA, because they are more savvy now and realize it may not be a better deal.NEXT: The evolution of the adviser-participant relationship.
Trout anticipates a “big bang” scenario where regulatory forces and new technology come together to create an open marketplace for retirement plans. Participants are stuck with whatever provider the plan sponsor chooses, but with increased portability and participants changing jobs more often, Trout sees the idea of the captive participant going away. “I’m not sure how it will happen, but maybe it will be more like health care private exchanges,” he says.
In addition, Trout says the ingrained relationship between managed account provider, plan provider and plan sponsor will be disrupted by regulation. “We could have a really hard push by the DOL that undercuts the monopoly.” Providers will come under pressure for being part of a high-cost system with revenue sharing and 12b-1 fees, he says, noting that particularly at small plan level, participants are paying double for advice services.
Trout notes in his article that Blooom, a relatively new robo-adviser, is forging partnerships with private health care exchanges with the ultimate goal of offering integrated medical and retirement benefits plans. It offers a direct-to-consumer model in which Blooom has direct control of investments. “Longer term, it seems likely that the direct-to-consumer model should gain traction as the nature of employment shifts from a career path to a series of consulting gigs, and 401(k) plans are made portable (i.e., less sponsor-centric) in response to this new way of working.
Trout adds that 401(k)s have been served in isolation from the adviser standpoint, but they should be part of a bigger picture and integrated with advising all assets. “How can an adviser know what’s best for retirement assets, if he doesn’t know what assets participants have otherwise,” he queries.
He thinks advisers should look at automation and consider partnering with providers such as Blooom or others down the road to serve DC participants in a more scalable way. “Serving participants directly is challenging, so advisers need to look at robo-type solutions for advice and models such as Blooom’s where they are actually managing accounts,” he concludes.