Not everything that happens in Vegas stays in Vegas. Last week I attended the 401kWire Influencers’ Summit, as well as the ASPPA 401k Summit and after a brutal five days of hardly ever seeing the light of day, I learned a lot.
Let’s start with the 401kWire Influencers Summit, since that was where the industry leaders and top advisors gathered to discuss what is happening in the industry. I’ll outline the top trends that struck me and then expand on a few below and hit on more in a later post.
- Fee disclosure will collapse margins
- Big focus on improving plan outcomes / savings rates, with the idea floated of doing an industry “Got Milk” style media campaign to get savings rates to 12%
- If the industry doesn’t improve outcomes, they are essentially inviting the government to gut their business model
- Advisors are the key to better outcomes through one-on-one meetings with participants (advisors are the one part of the industry that are not yet a commodity)
- Most vendors have drunk the behavioral finance Kool-Aid, around plan design and “free lunches” (see Dan Ariely’s book “Predictably Irrational”) that induce participants to improve their behavior
- Investment solutions will increasingly move in the direction of defined benefit plans, with lifetime income solutions (for all the talk about meddling government intervention, I heard someone float the idea that these investments should be government backed!)
- Advisor or plan sponsor access to recordkeeper data is coming (my guess this is still a long way off)
- Mobile technology is a trend/reality that vendors need to wake up to
- The industry needs disruption (unlikely to come from an incumbent)
- Social networking is something they feel needs to be harnessed, but have no idea how to do it
- Recordkeepers are moving to an a la carte business model where services can be added, with a breakdown on cost for transactional (the 87 octane option) and advice (the non-commoditized 91 octane option); also expect significant consolidation in RKs as margins flatten and technology costs increase
- Plan sponsors are paternalistic when it doesn’t cost them anything (this doesn’t apply for non-profits)
- Coming industry conflict will be between fiduciaries and non-fiduciaries
While we’re new to the 401k space, what stuck me is that advisors and industry leaders were thinking about retirement in the same way we were when we started Boulevard R in 2006 (focus on improving plan outcomes). The main difference is that the landscape has shifted with the market of 2008, fee disclosure, the ascendance of behavioral finance and the growth of mobile technology.
Improving Plan Outcomes
One of the panelists at the 401kWire Summit asked the audience to think about not only their profit motive, but also the social good that 401k plans provided. It’s pretty clear that Obama and many Democrats see 401ks as a vehicle for social good and new regulations aim to improve outcomes by lowering costs and reducing the industry’s profit margins.
The challenge is that the 401k was designed to be a secondary vehicle for retirement savings and as companies have cut defined benefit plans, they are not willing to increase the cost of their 401k plans. Even though they save thousands of dollars per employee with a 401k plan, employers are hard pressed to add any cost to the plan, even if that means a further decline in plan outcomes. The challenge is then to identify plan services that deliver no or little value (eg. daily trading capabilities, enrollment/educational brochures, etc.) and replace them with services that can measurably improve savings rates.
The further challenge is that plan sponsors don’t really want more participants to max out the company match, making the plan more expensive. So we need to create some tools and processes to improve plan outcomes, while restructuring the company’s contribution in such a way that the overall cost to the plan sponsor is insignificant.
Advisor Is Ascendent
It was no coincidence that the 401kWire’s event focused on advisors (aka Distributors) for the entire first day. Vendors echoed the importance of advisors as “boots on the ground” and the key changes agents when it comes to improving plan outcomes. One panelist characterized advisors falling into one or at most two of these personality types:
- Engineer (focused on plan design and all things quantitative and measurable)
- Philosopher (focused on education and how to improve outcomes (caveat- I’m not 100% sure about this definition))
- Networker (loves people, winning plans and the sales side of the 401k business a natural sales person)
As the industry moves towards independence, transparency and meeting fiduciary needs advisors are playing an increasing central role. My guess is that more advisors will start breaking into the direct sold marketplace, since they have a better story to tell and can often provide a better mix of low cost investment options.
There was significant discussion about the generalist or advisor who dabbles in 401k plans, being pushed out of the market as plan specialist take away their share of the business. However, it was also pointed out that many of the plans are run by advisors who have a personal relationship with the business owner or fiduciaries (eg. brother in law, college buddy) and that it won’t be so easy to terminate these relationships.
Though I don’t remember this being discussed explicitly, rollovers are a massive opportunity as the huge demographic shift from Accumulators to Retirees starts to happen. According to Cerulli, by 2015 at least $2T or 48% of $4.6T will be “in play” which is why I’m guessing that Schwab is rolling out a new service that couples low cost ETF funds with some type of professional advisor/advice model for each participant (more on that in another post).
Leveraging Mobile and Social Technology
There was a lot of talk about using mobile and social technology to improve plan outcomes. Personally, I think it’s hard for participants to have a very quality interaction on a cell phone. They’re good for games, but I don’t think participants want to play a 401k games. Where I see a real opportunity is with iPads and using both the interface to engage participants around their financial goals, as well use tools like video conferencing to reduce costs and improve outcomes. There will seemingly always be a need for an advisor, but how do we make that experience more effective for both parties?
When it comes to social networking tools, I see the Fidelity’s of the world having a hard time getting traction on Twitter and Facebook. Partly it’s a compliance issue, but mostly it’s a coolness issue. Who wants to hear what a cooperation has to say, unless it’s hip, relevant and can save me time or money (JetBlue)? Why would I want to add Putnam or Schwab to my flow of information overload?
Disruption: From Where?
I think most key industry players recognize that the 401k industry has been complacent. What motivation did they have to change with such healthy profit margins? It was pointed out that many of the current CEOs of major financial services companies came up through the DC side of the business, but are those really the people who are going to risk the future of a company in order to re-invent it?
While there is a need for a new way to evaluate the success of 401k plans and get them on track, I’d be surprised to see it come directly from the 401k industry. I know Putnam has developed a monthly income forecaster, but most DC-IOs have few if any tools and even then, they are proprietary and provide no data through to the advisor.
Looking out across the 401k landscape, the only new disruptive company that I can think of is Brightscope. All the rest are geared toward just helping vendors or advisors do a better job. Financial Engines has had a somewhat disruptive impact in the Jumbo plan space, but they now sell by partnering with the vendor and have a big payout in the form of their Cost of Revenue.
The key to disruption is developing processes and software that leverage the impact of the advisors and cut out ineffective costs, while getting more assets into the plan by making it easy and compelling for participants to save more. This is an approach that Boulevard R is committed to seeing through with Retiremap and look forward to sharing our results as we roll it out for the initial plans in the coming months.