The “big data” buzzword is so ubiquitous that people forget how recently it came into play. It was only within the last decade that true technology integration finally arrived and allowed data—reams and reams of data—to be shared, studied, spliced and scrutinized for the benefit of the consuming public.
The trend is making an impact in the 401(k) and retirement plan space, and not a moment too soon. Alongside dramatic demographic and regulatory change, the ongoing shift from defined benefit (DB) pension plans to defined contribution (DC)-style individual account plans has workers and their advisers worried, wondering if successful participant outcomes are still possible in the age of significant increases in life expectancy.*
New financial regulations meant to address the appropriateness, suitability—and, yes—fiduciary responsibility required of advisers are also pressing issues and part of a larger effort to quash conflicts of interest and ensure clients’ needs are met first. With all of this in the background, technology solutions are increasingly front and center in the investment due diligence process.
The technology conversation is no longer simply about the amount of data available, but rather how it is used and, more specifically, how granular it is, as to the view it affords advisers and registered representatives.** Once enjoyed only at the provider and plan levels, transparency, enabled by big data technology, now extends to the retirement plan participant level.
This is a critically important development for a number of reasons, beginning with the adviser’s opportunity to help improve outcomes. It allows for the adviser to see the actual positions participants hold and their account balance, allowing them to make more informed decisions. Previously, the adviser could gain access to some participant-level data through a recordkeeper portal; however, to bring it all together with new data-mining technology allows her to see the whole book of business in one place. This results in greater transparency and flexibility, to the benefit of all involved.
The siloed nature of the retirement plan industry was long a roadblock to greater transparency—as was the lack of suitable technology, combined with a reluctance among industry stakeholders to share data in a meaningful way. Yet, client demand for newer and better business models, and the advisers’ response, started a transparency sea change over the past decade, with the results now being felt industrywide.
This change has been given a turbo boost by the Department of Labor (DOL) conflict of interest rule, known colloquially as the fiduciary rule. Even though the future of the rule may now be in limbo, the fiduciary mindset has taken a strong foothold both in the industry and among investors, which will likely continue to drive increased transparency at both the plan and participant levels.
NEXT: Lessons for B/Ds and RIAs
Whether one is a broker/dealer (B/D), a professional in the registered investment adviser (RIA) space, or even a plan sponsor that wants to make certain its employees are actually receiving appropriate care and support from the financial professionals serving its plan, the need to share data in a very controlled and efficient way is critical to success. Having a “window into the data” will also help broker/dealers and RIAs assign the roles and the levels of access they grant their various advisers and support staff. Of course, the data doesn’t tell them what to do or how to do it; it simply gives them the information needed to make informed decisions.
Retirement plan research firm BrightScope reported that, in 2013, for the first time, withdrawals from 401(k) plans exceeded new contributions. It was an inflection point for the industry and signaled a shift in the 30-year defined contribution experiment—moving from a heavy concentration on the accumulation of retirement assets to the strategies and solutions needed to address the distribution, or decumulation, phase.^ The importance of ensuring successful participant outcomes by helping to make the assets last suddenly came into sharp relief and is another area where participant-level data transparency is critical.
Being able to exist in a world where data can be accessed in a manner that gives the participant more empowerment and choice, while integrating it with best-of-breed, third-party tools and solutions to help him achieve those outcomes, will be liberating for the adviser, who until recently had to rely heavily on—and was largely beholden to—the particular retirement plan’s service provider. This flexibility, choice and empowerment also go a long way in boosting the retirement plan adviser’s value proposition. Studies show that investors who work with advisers and registered representatives can add up to 3 percentage points of additional return—something research provider Morningstar refers to as “gamma”—which is made all that much easier with greater participant-level transparency.^^
So advisers should consider taking action today. New and well-established provider partners are now available to help integrate, aggregate and navigate relevant information and data sources to make the adviser more effective in building out the business—and the plan participant more successful in achieving an affordable quality of life in retirement.
* “We’ll Live to 100—How Can We Afford It?”
World Economic Forum
** “How to More Effectively Use Big Data to Serve 401(k) Participants,” 401kspecialistmag.com
^ “Money Flows Out of 401(k) Plans as Baby Boomers Age,” WSJ.com
^^ “Advisers Can Add 3 Percentage Points to Clients’ Net Returns,” Investmentnews.com